This course deals with the techniques of generating project ideas directed to the effective realization of project ideas which is expected to solve meaningful social problem. As resources are generally scarce the ideas generated as a project should be appraised first for their pre-feasibility and finally for their feasibility in terms of various issues of importance. In this module, project idea generation, idea screening, technical analysis, financial analysis, human resource analysis, market analysis, economic analysis, ecological analysis etc. will be discussed. The module culminates on developing the skill in preparing and appraising feasibility of the project. More importantly, the module provides techniques of application of software packages in project initiation and appraisal phases.

1. Project Identification, Analysis and
Appraisal
Admas University
2023

2. Outline
• Introduction to Project Idebntification
– Project idea generation methods
– Methods and techniques
• Progect Appriasal

3. Project Identification Tools
CH-I

4. Project Identification
• Project identification is an important step:
The project ideas for developmental projects
come mainly from the national planning
process.
Industrial projects usually stem from
identification of commercial prospects and
profit potential.

5. Cont…
• Project identification and selection fit in the
Project Initiation Phase.
• Within the initiation phase:
– Problem or opportunity is identified
• A solution is defined, a project is formed.

6. Cont…
• A detailed description of the problem or
opportunity.
• A list of the alternative solutions available.
 A description of the preferred solution
(ideas).

7. Project idea generation
• Project selection process starts with the
generation of a project idea.
• Most of the project ideas are variant of present
products or services.
7

8. Cont…
• The project ideas can be generated from
various Sources:
Knowledge of market, products, and services.
Knowledge of potential customer choice.
Emerging trends in demand for particular
product.
 Scope for producing substitute product.
Market survey & research.
8

9. Cont…
Government Development plan
 Ideas given by the experienced person.
 Ideas by own experience.
SWOT analysis.
Need Assessment
9

10. Somaliland Overviews
• Somaliland’s GDP amounted to $2.5 billion
• GDP per capita estimated yearly at $566
• The Somaliland Budget for the fiscal year 2021 amounts to $339
million.
• An increase of 2.9% from the previous fiscal year budget.
• The 2021 had increased a whopping 117% from 2015 when the
actual budget was $156.1 million.

11. Cont...
• Somaliland is one of the countries with low social service.
• The sectors of education, Health and Water are foundation of life in
society, the fiscal year budget allocated 16% for total budget 2021.
• Development projects show a slight decrease of 3.1%, were only
allocated 8% of the budget.
• Government expenditures on recurrent activities that account for
more than 73% of the total budget.

13. Cont...
• SDF $10.4 million, World Bank projects $7.5
million, and JPLG are $1.5 million.
• Development project are only allocated 8% of
budget 2021
• The cost of the projects should increase at
minimum 25%.

14. Problem Analysis
What is a Problem Analysis?
 Problem analysis is central to many forms
of project planning.
 It identifies the negative aspects of an
existing situation.

15. Cont…
– It is often the first step that can help to find
solutions.
• By analyzing and mapping out the
relationship of causes and effects around a
main problem.
– Problem analysis is the step in Project
Identification.

16. • Finding the causes and effects of the problem.
• Finding the root cause of the problem.
• Which is the problem to be solved?
• Who owns the problem?
• Establish the causes and effects relationship to
the focal problem
• The causes of the problem should be
solved in a reasonable time frame and
resources.
16
Cont…

17. Cont…
– In other words,
• Cause is the why something happens,
and
• Effect is the what that has occurred as a
result
• Root Cause: cause that, if corrected, would
prevent recurrence of this and similar
occurrences.

18. Cont…
• Projects evolve out of identified problems:-
– It is the problem that comes before a project idea
– The secret of solving a problem is proper
identification of the problem.
– A problem does not happen in isolation.
– It goes hand in hand with cause and effect.

19. Recommended tool for Problem Analysis:
Problem Tree Analysis
 Problem tree analysis
examines the
negative aspects of
an existing situation
and establishes the
‘cause and effect’
relationships between
the identified
problems.
19
Causes
Effects
Main Problem

20. PROBLEM
Poor road Costraction
Flood in Hargisa
City
lose of life
20

21. Problem Tree Analysis
21
Headache
Bad-tempered &
Staff unhappy
Effects
Problems
Causes
Health
problem
No sleeping Excess Khat
Stress
Arguments
with partner
Low
Productivity

22. Assignment I
Individual work develop a Problem Tree
through the use of Problem Tree Analysis.
– Take any Problem in Hargisa
– Take any problem outside Hargisa but in
Somaliland
Note: Do not use the examples used in the class

23. Idea Generation Techniques
• Active Search:
– Active search refers to hunting for a particular
solution.
• Attribute List:
– Attribute listing taking an existing product or
system,
– Breaking it into parts
– Recombining these to identify new forms of the
product or system. (Elon Mask example)
23

24. Cont…
• Brainstorm:
– Generating a large number of solutions to a
problem .
– Focus on the quantity of ideas
– No ideas are evaluated; in fact unusual ideas are
welcomed.
– Ideas are often combined to form a single good
idea as suggested by the slogan “1+1=3”.
– Brainstorming can be used by groups as well as
individuals.
24

25. Cont…
• Collaborate:
– Collaboration refers to two or more people
working together towards a common goal.
– Designers often work in groups and co-create
during the entire creative process.
25

26. Cont…
• Critique:
– Critique refers to receiving input on current ideas.
– This could be collaborative such as receiving a
design critique from a colleague or individuals
critiquing their own ideas.
– This technique often spurs new thought by finding
solutions to fault within current concepts.

27. Screening Project Ideas
• The alternative project ideas must adherence
to:
– Government policies,
– Development vision and
– Prioritized on the basis of their benefits and ease of
implementation.
• This leads to an ordered list of possible
projects.
27

28. Capital Budgeting
CH-II

29. What is capital budgeting ?
• The efficient allocation of funds
• Allocation of funds means investment of funds
in assets or activities:-
– acquisition of fixed assets,
– changes in old assets and
– their replacement.

30. Features of Capital Budgeting
Decisions
• Investment of fund is made in long-term
assets.
• The exchange of current funds for future
benefits.
• Future profits accrue to the firm over several
years.
• These decisions are more risky

31. Importance
• Investment decisions require special attention
Growth
Risk
Funding
Irreversibility
Complexity (difficult to predict the future)

32. KINDS OF CAPITAL EXPENDITURE DECISIONS
• Expansion and diversification
–A company may add capacity to its existing
product lines to expand existing operations
–Investment in existing or new products may
also be called as revenue-expansion
investment
• Replacement and modernisation

33. Other classification
• Mutually exclusive investments
– serve the same purpose
– Compite each other
eg. capital intensive vs labour intensive
• Independent investments
– serve independent purpose
– not compite each other
• Contingent investments
– interdependent inverstment

34. CAPITAL BUDGETING PROCESS
• Divided into five broad phases:-
– Planning (identification of individual project
opportunities, scrining)
– Analysis (gathering, preparing and summarising
relevant information about various project
proposals)
• Under this a detail analysis of the marketing, technical,
economic and ecological aspects in undertaken

35. Cont...
–Selection (Project would be selected in the
order in which they are ranked)
• A wide range of appraisal criteria have been
suggested for selection a project.
– Implementation
– Review

36. CRITERIA OF CAPITAL BUDGETING
• There are two broad criteria of capital
budgeting :
– Non discounting criteria
– Discounting Criteria

37. Numeric Models: Profit/Profitability
– Payback period - initial fixed investment/estimated
annual cash inflows from the project
– Average Rate of Return - average annual
profit/average investment
– Discounted Cash Flow - Present Value Method
– Internal Rate of Return - Finds rate of return that
equates present value of inflows and outflows.

38. Cont…
24.05.2023 38
Prepared by Kedir Jemal

39. Nonnumeric Models
• Sacred Cow
– project is suggested by a senior and powerful official in
the organization
• Operating Necessity
– the project is required to keep the system running
• Competitive Necessity
– project is necessary to sustain a competitive position
• Product Line Extension
– projects are judged on how they fit with current product
line.

40. Project Analysis
Preparation /Feasibility
CH-III and IV

41. Introduction
• In depth investigation of the factors that affect
the future success of a project:
• The main areas of project analysis are;
Commercial/market
Technical
Financial
Economic and Social soundness
Environmental
etc

42. Market and Demand
• The first step in project analysis is to estimate
the potential size of the market.
• Analysis of various factors such as:-
– Target customer
– Nature of competition,
– Income levels of the society,
– Availability of substitutes,
– System of distribution channels,
– etc

43. Objectives of market and demand analysis
Identify potential consumers or buyers.
Gathering secondary data
Somaliland DHS
Censuse survey
Market survey (secondery is not enough) primary
data/ information
Forcasting demand (for decition making)

44. Market survey
• MARKET RESEARCH: is the collection and
analysis of data.
 Understanding the behavior of consumers in a
certain market.
The market survey may be a census survey or a
sample survey.

45. Cont...
• You may look to one or more of the following:
Identify potential markets
Unsatisfied needs or demand,
Purchasing power of customers,
Satisfaction with the existing product or
service,
Attitude towards the product or service,
Socio – economic conditions of the consumers,

46. Demand Forcasting
• Based on information can estimate future
demand
• Why?
• Forecast time horizons
–Short term (days, weeks): shift scheduling
–Medium Term (weeks, months): workforce
planning, materials purchasing, promotions
–Long term (months, years): capacity
expansion, capital/financial budget

47. Some general characteristics of forecasts
• Forecasts are always wrong
• Forecasts are more accurate for shorter
time periods
• Every forecast should include an error
estimate
• Forecasts are no substitute for
calculated demand.

48. Types of Forcasting
▶ Time-Series Forecasting
▶ Associative Forecasting Methods:
Regression and Correlation Analysis

49. Time Series: Moving average
• The moving average model uses the last t
periods in order to predict demand in period
t+1.
• Simple moving average
• The moving average model assumption is that
the most accurate prediction of future demand
is a simple (linear) combination of past
demand.

50. Time Series: Simple Moving Average
In the simple moving average models the forecast value is
Ft+1 =
At + At-1 + … + At-n
n
t is the current period.
Ft+1 is the forecast for next period
n is the forecasting horizon (how far back we look),
A is the actual sales figure from each period.

51. Example: forecasting sales at SBI
SBI sells (among other stuff) bottled water
Month Bottles
Jan 1,325
Feb 1,353
Mar 1,305
Apr 1,275
May 1,210
Jun 1,195
Jul ?
What will
the sales be
for July?

52. What if we use a 3-month simple moving average?
FJul =
AJun + AMay + AApr
3
= 1,227
What if we use a 5-month simple moving average?
FJul =
AJun + AMay + AApr + AMar + AFeb
5
= 1,268

53. Associative Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in
the dependent variable
Most common technique is linear
regression analysis

54. Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique
y = a + bx
^
where y = value of the dependent variable (in our example,
sales)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
^

55. Associative Forecasting
Example
NODEL’S SALES
(IN $ MILLIONS), y
AREA PAYROLL
(IN $ BILLIONS), x
NODEL’S SALES
(IN $ MILLIONS), y
AREA PAYROLL
(IN $ BILLIONS), x
2.0 1 2.0 2
3.0 3 2.0 1
2.5 4 3.5 7
4.0 –
3.0 –
2.0 –
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll (in $ billions)
Nodel’s
sales
(in$
millions)

56. Associative Forecasting
Example
SALES, y PAYROLL, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
x =
x
å
6
=
18
6
= 3 y =
y
å
6
=
15
6
= 2.5
b =
xy -nxy
å
x2
-nx2
å
=
51.5-(6)(3)(2.5)
80-(6)(32
)
= .25 a = y -bx = 2.5-(.25)(3) =1.75

57. Associative Forecasting
Example
SALES, y PAYROLL, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
x =
x
å
6
=
18
6
= 3 y =
y
å
6
=
15
6
= 2.5
b =
xy -nxy
å
x2
-nx2
å
=
51.5-(6)(3)(2.5)
80-(6)(32
)
= .25 a = y -bx = 2.5-(.25)(3) =1.75
ŷ =1.75+.25x
Sales =1.75+.25(payroll)

58. Associative Forecasting
Example
SALES, y PAYROLL, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
x =
x
å
6
=
18
6
= 3 y =
y
å
6
=
15
6
= 2.5
b =
xy -nxy
å
x2
-nx2
å
=
51.5-(6)(3)(2.5)
80-(6)(32
)
= .25 a = y -bx = 2.5-(.25)(3) =1.75
ŷ =1.75+.25x
Sales =1.75+.25(payroll)
4.0 –
3.0 –
2.0 –
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll (in $ billions)
Nodel’s
sales
(in$
millions)

59. Associative Forecasting
Example
If payroll next year is estimated to be $6 billion,
then:
Sales (in $ millions) = 1.75 + .25(6)
= 1.75 + 1.5 = 3.25
Sales = $3,250,000

60. Technical Analysis
• Technical analysis Includes:
Availability of Land and site
Availability of Water Power, transport,
communication facilities.
Availability of servicing facilities like machine shop,
electric repair shop etc.
Availability of work force
Availability of required raw material as per quantity
and quality

61. Cont...
• Production processes and equipment
• Availability of raw material, labour, and other
inputs etc.
• Availability of Infrastructure
• Location selection
• etc

62. Scoring Models location choice
• The scoring model of location selection
decision.
• The objective is to choose the location
considering all relevant factors.
• A six step process for using the scoring model

63. Steps
Step 1: List all factors that affect the location
decisions.
Step 2: Assign a weight to each factor.
Step 3: Identify alternative locations

64. Cont....
Step 4: Each alternative is evaluated and is given a
score on a ten point scale (it could be a 100 point
scale) for each alternative.
Step 5: The total score for each location is calculated
by multiplying the weight of each factor by the points
it earned (weight x score) and then adding this number
for all factors.
Step 6: The total score for each location is calculated
and then the locations with the highest score is
selected.

65. Project Location choice – Scoring
Models
Scoring Model
Location Alternatives
Borema Berbera Buro Hargisa
Factor Name Weight Score out of 10
Labor Productivity 0.15 8 7 3 6
Nearness to Markets 0.18 4 6 9 7
Nearness to Sources of
Raw Material
0.25 3 5 2 8
Infrastructure Facilities 0.12 7 3 4 4
Transportation Facilities 0.08 6 6 7 9
Power Availability 0.08 5 8 6 7
Political Climate 0.03 9 9 8 8
Labor Unions 0.02 3 4 3 3
Labor Cost 0.04 6 5 5 5
Material Cost 0.05 7 2 1 2
Total (weighted sums) 1.00 5.31 5.51 4.64 6.52 65
Evaluation of Various Location Sites

66. Financial Analysis
• In order to adjudge the financial viability of the project,
the following aspects need to be carefully analysed:
 Cost of capital
 Means of finance
 Estimates of sales and production
 Cost of production
 Working capital requirement and its financing
 Break-even point
• etc

67. Enviromental Assessment/Apprisal
• It is an interdisciplinary and multistep
procedure
• To ensure that environmental considerations
are included in decisions regarding projects.
• Identify the possible environmental effects of
a proposed activity
• How those impacts can be mitigated

68. Cont...
• The purpose of the EIA process is:
– to inform decision-makers and
– to inform the public of the environmental
consequences of implementing a proposed
project

69. BENEFITS OF THE EIA PROCESS
• Potentially screens out environmentally-
unsound projects
• Proposes modified designs to reduce
environmental impacts
• Identifies feasible alternatives
• Predicts significant adverse impacts

70. Cont....
• Identifies mitigation measures to reduce,
offset, or eliminate major impacts
• Engages and informs potentially affected
communities and individuals
• Influences decision-making

71. Cont....
• EIA process does not guarantee that a project
will be modified or rejected.
• In some countries, a decision-maker may, in
fact, choose the most environmentally-
harmful alternative,
• The EIA process ensures an informed
decision,
• but not necessarily an environmentally
beneficial decision

72. Cont....
• An EIA is often mandated by law for major:
– infrastructure,
– commercial, industrial, or
– residential development proposals
• EIA has been made mandatory by legal
systems in many countries.
• The EIA process can take two years or more to
complete.

73. Somaliland Enviromental Mgt Act
• Project
– includes any project, programme or policy that leads to projects
which may have an impact on the environment;
• Enviroment
- “Environment” includes the physical factors of the surroundings of
human beings including land, water, atmosphere, climate,
• “Environmental impact assessment”
– means a systematic examination conducted to determine
whether or not a programme, activity or project will have any
adverse impacts on the environment;

74. Cont....
• Environmental management:-
– includes the protection, conservation and
sustainable use of the various elements or
components of the environment;

75. Cont....
• “Sustainable development”
– means development that meets the needs of the
present generation without compromising the
ability of future generations to meet their needs
by maintaining the carrying capacity of the
supporting ecosystems;

76. Cont...
• Sustainable use:
– means present use of the environment or natural
resources which does not compromise the ability
to use the same by future generations or degrade
the carrying capacity of supporting ecosystems;

77. Article 5
Functions of the Ministry
• The functions of the Ministry are:
1. Determine policies for the management,
protection and use of the environment;
2. Prepare and publish policies, strategies, objectives
and standards for the management and protection of
the environment;
3. Co-ordinate environmental management at
national level; and
4. Monitor and ensure compliance with the Act.

78. Article 3. General Principles (Selected)
• Principle 1: To ensure all people living in the
country the fundamental right to an
environmental adequate for their health and
well being.
• Principle 4: Community awareness on
environmental issues should be sustained;
• Principle 5: Renewable resources must be
used on a sustainable basis

79. Cont....
• Principle 8. the participation of all interested
and affected parties must be promoted and
decisions must take into account the interest,
needs and values.
• Principle 10: assessments must be
undertaken for activities which may have a
significant effects on the environment or the
use of natural resources;

80. ARTICLE 23
ENVIRONMENTAL ASSESSMENTS
1. Environmental impact assessment must be carried out by a
competent person(s) or institution before carrying any of the following
activities of a major scale:
 Land use and transformation;
 Water use and disposal;
 Resource removal, including natural living resources;
 Resource renewal;
 Agricultural processes;
 Industrial processes;
 Transportation;
 Energy generation and distribution

81. Cont...
2. Any and all of the above activities cannot be
undertaken by a person(s) or institutions
without having an environmental clearance
certificate.

82. Who make the Assessment/Apprisal
• The proponent of a project shall undertake at
his ownexpense an environmental impact
assessment study.
• Environmental impact assessment studies
beconducted:
– individual experts or
– a firm of experts authorized in that behalf by the
Authority

83. Ministry of Energy and Minirals (SL)
• The vision of the Ministry of Energy and
Minerals is to contribute to Somaliland’s social
and economic development through the
sustainable utilization of the country’s
energy, minerals and petroleum resources for
the benefit of all Somaliland people by 2030.
• Petroleum Exploration Project

84. Economic Analysis
• Improve the welfare of the community
• Jobs it will generate,
• Effect on pollution,
• Convenience of masses,
• Environmental effects,
• etc.

85. Example
• A road, besides earning revenue for builders,
generates jobs for people (directly for people
employed in construction and indirectly for
people employed in cement and steel
industry), gives convenience to people, saves
precious fuel and time for people, saves
foreign currency for govt (through savings in
fuel), improves environment due to reduced
fuel consumption, and so on).

86. Context
86
Pressure to
accelerate
infrastructure
delivery
Infrastructure
can increase eco
& social welfare
SL is faced with
fiscal constraints
We need to develop a philosophy around investing in
infrastructure that maximises value for money and
creates a better life for Somaliland citizens!

87. Value for Money?
87
The value of infrastructure lies in
the economic & social activities
it supports, not in the
construction cost!
The cost to put infrastructure in
place, is simply an expenditure,
not a guarantee for value
creation!
Value Money
Let’s make sure
we create VALUE,
not just spend
MONEY!

88. 88
Is the infrastructure aligned with the socio-economic
context?
Can evidence of demand for the service be
demonstrated?
Is the project viable & is it the best
alternative?
Can society bear the costs?
Is there enough
implementing
capacity?
How do we recognise projects that
will create value?
1
2
3
4
5
(3) Welfare
(4) Repayment
(5) Delivery
5 consecutive
questions that
need to be
answered!
(1) Context
(2) Demand

89. 89
The social context The economic context
Is the infrastructure aligned with the socio-economic
context of SL?
 Expansion of urban townships
 Disperse & poor population in rural
areas
 Widespread & structural unemployment
 Rural & urban areas have different
economic drivers
Understanding the drivers that created the
need for infrastructure is crucial. What is
the motivation for the project?
Understand the environment & the actual
problems before proposing projects
Understand the economy & the actual drivers
before proposing projects
 Target expanding areas
 Distinguish between rural & urban
areas
 Ensure investments make individuals
more productive
 Target private sector growth areas
 Focus on comparative advantages
 Target investments that can support
employment creation in the long-run
Too often,
infrastructure is
considered a
magical solution
for all kinds of
problems
Example
Water provision in rural
or urban environments
must be tackled
differently, as the
context is different

90. 90
Projects with a high social demand
Social demand evidence:
 Household surveys & poverty maps
highlight service gaps
 Promises in constitution & elections
 Service delivery protests
Projects with a high economic demand
Economic demand evidence:
 Traffic congestion or rising property prices
 Input price hikes (electricity, water, fares)
Can evidence of demand for the service be
demonstrated?
 Target the social backlogs
 Listen to what the people are telling
you
 Use phased construction approaches
if demand has not yet materialised
fully
 Aim to unblock largest supply constraints
 Listen to what the industry is telling you
 Ensure that the cost of postponing a project is
larger than the benefit of postponing

91. 91
Is the project viable?
Viable social infrastructure projects
 The infrastructure must generate
social benefits (improved livelihood,
health benefits, etc.) at the lowest
cost possible
The infrastructure must generate more
economic direct benefits (efficiency gains)
than direct costs (construction, O&M)
 Perform a Cost-Effectiveness
Analysis for every single project
 Perform a Cost-Benefit Analysis for every
single project
Viable economic infrastructure projects
3
Understand the analytical tools you can
use to assess investment effectiveness
Understand the analytical tools you can
use to assess investment efficiency

92. 92
Can society bear the costs?
Intra-generational equity
3
User:
 Identified users benefit directly from service
 Charges are aligned with the benefits
 Charges for essential goods are affordable
 Affordability ends when user charges
crowd-out other expenditures in disposable
income and thereby hamper growth
Taxpayer:
 wider & substantial benefits beyond users
 indivisible benefits for society as a whole
 affordability issues for critical services
 Affordability ends when fiscal principles
can no longer be adhered to due to too
high demand on the fiscus
100% taxes 100% user charges
Repayment Continuum by payer
 If users cannot pay, taxpayers must
 Financing of infrastructure is limited not by the sources of (innovative) financing, but by
the affordability of users and taxpayers
So what would be equitable & sustainable repayment?

93. Can society bear the costs?
Inter-generational equity
93
 If the current generation cannot pay, the future generation must
 Financing of infrastructure is limited not by how much Gov’ can borrow, but by how much
Gov’ should borrow (the sustainability of debt & interest repayments)
100% now 100% in the future
Debt repayment period
Repayment Continuum in time
So what would be equitable & sustainable repayment?
 Spread the costs of infrastructure over the same time as the benefits
 Use inter-generational accounting and aim to maintain a stable
(tax burden) / (services received from Gov’) ratio
4

94. 94
A good institutional set-up is not a guarantee for delivery!
But it can certainly help…
Mandate Incentives Capacity
 Should promote
clear accountability
 Should promote
value creation, not
spending
 Should limit political
interference
 For good governance
 For both construction
& operational delivery
 For spending
discipline
 For LT sustainability
 Planning capacity
 Technical leadership
 Procurement capacity
 Contract management
 Risk mitigation
 Monitoring &
evaluation
Is there enough implementing
capacity? 5
Ensure the delivery mechanism has the correct
mandate, proper incentives and the capacity to deliver
the promised benefits of the infrastructure

95. Methodologies of Project Apprisal
CH-V

96. Project Appraisal
• It is a techniques use to determine if a
particular project is worthwhile.
• It can be used to compare different projects to
determine which is more favourable.
96

97. Cont....
• Usually, companies are deciding between
multiple possible projects.
• Comparing various profitability metrics for all
projects is important when making a well-
informed decision.

98. Methodologies Project Appraisal
 Pay Back Period (PBP)
 Discounted pay Back
 Accounting Rate of Return (ARR)
 linear programing method
 Net Present Value (NPV)
 Profitability Index

99. Non-discounting techniques
Pay Back Period
• It simply means the time it takes an
investment to pay back the amount
invested.
• The decision rule is that projects with the
minimum pay back time are acceptable.
• It is one of the simplest
99

100. Cont...
• The formula to calculate the payback period of an
investment depends on whether the periodic cash
inflows from the project are even or uneven.
• If the cash inflows are even, the formula to
calculate payback period is:
• Payback Period = Initial Investment/Net Cash Flow
per Period

101. Example 1: Even Cash Flows
• Telesom is planning to undertake a project requiring
initial investment of $105 million. The project is expected
to generate $25 million per year in net cash flows for 7
years. Calculate the payback period of the project.
• Solution
Payback Period = Initial Investment ÷ Annual Cash Flow
= $105M ÷ $25M
= 4.2 years (Break-Even Point)

102. Example 2: Uneven Cash Flows
• Telesom is planning to undertake another
project requiring initial investment of $50
million and is expected to generate $10
million net cash flow in Year 1, $13 million in
Year 2, $16 million in year 3, $19 million in
Year 4 and $22 million in Year 5.
• Calculate the payback value of the project.

103. Cont...
• Payback Period =A +B/C
Where,
A is the last period number with a negative cumulative cash
flow;
B is the absolute value (i.e. value without negative sign) of
cumulative net cash flow at the end of the period A; and
C is the total cash inflow during the period following period A

104. Example 1
PAYBACK PERIOD (when the cost of investment has been paid
off)
4 YEARS
YEAR CASHFLOW (£) CUMULATIVE CASH
FLOW (£)
0 (10,000) (10,000)
1 2,000 (8,000)
2 3,000 (5,000)
3 4,000 (1,000)
4 1,000 0
5 2,000 2,000

105. Exercise Payback Period
A project requires an initial investment of $200,000 and will
generate cash savings of $75,000 each year for the next five
years. What is the payback period?
Year Cash Flow Cumulative
0 ($200,000) ($200,000)
1 $75,000 ($125,000)
2 $75,000 ($50,000)
3 $75,000 $25,000
Divide the
cumulative amount
by the cash flow
amount in the third
year and subtract
from 3 to find out
the moment the
project breaks even.
25,000
3 2.67
75,000
years
 
03-105

106. The Discounted Payback
• Discounted payback period is the length of
time required for an investment’s discounted
cash flows to become equal to its initial cost.
• Based on the discounted payback rule, an
investment is acceptable if its discounted
payback is less than pre specified number of
years.

107. Cont...
• Discouted cash flow =
Actual cash flow/(1+r)^n
or
Discouted cash flow =
Actual cash flow * 1/(1+r)^n

108. 108
Example
Suppose that we require a 12.5% return on
new investments.
We have an investment that costs $300 and
has cash flow of $100 per year for five
years.
To get the discounted payback, we have to
discount each cash flow at 12.5% and then
start adding them.

109. 109
Cont…
Cash flow Accumulated cash
flow
Year Undis-
counted
Discoun-
ted
Undis-
counted
Discoun-
ted
1 100 89 100 89
2 100 79 200 168
3 100 70 300 238
4 100 62 400 300
5 100 55 500 355

110. 110
Cont…
• We see that the regular payback is exactly
three years.
• The discounted cash flows total $300 only
after four years, so the discounted payback is
four years.

111. Accounting Rate of Return (ARR)
Accounting Rate of Return (ARR) expresses the
average accounting profit as a percentage of the
capital outlay.
• The decision rule is that projects with an ARR above
a defined minimum are acceptable; the greater the
ARR, the more desirable the project.
111

112. Cont...
• Step 1: Calculate Average Annual Profit
Average Annual Profit
Total Profit /years
• Step 2: Calculate Average Investment
( Initial invest+ salvage value )/2
Step 3: Use ARR Formula

113. Equipment Equipment
X Y
Capital Cost $ 80,000 $ 150,000
Life 5 years 5 years
Profits before depreciation
Year 1 50,000 50,000
Year 2 50,000 50,000
Year 3 30,000 60,000
Year 4 20,000 60,000
Year 5 10,000 60,000
Disposal value 0 0

114. Cont…
• ARR is measured as the average annual profit
after depreciation, divided by the average net
book value of the assets.
• Should be selected, if any, if the company’s
target ARR is 30 %?

115. Solution
Eqpmnt X EqpmntY
Total profit over life
Before Depreciation 160,000 280,000
Depreciation 80,000 150,000
Profit After Dep 80,000 130,000
Average annual profit
After depreciation 16,000 26,000
(Capital Cost +disposal Value) /2 40,000 75,000
ARR 40% 34.7%

116. Cont…
• Both projects would earn a return in excess of
30%, but
• Since equipment X would earn a bigger ARR,
it would be preferred to equipment Y, even
though the profits from Y would be higher by
an average of $ 10,000 a year.
• Interprate the results !!!

117. Integer Programing Method
• What is integer linear programing?
• It is mathematical technices used to allocate scarce
resources.
• Way of optimizing resources use:-
• Capital budgeting:-
- Capital is Limited
- Management would like to select the most
profitable projects

118. Binary Integer linear Programming
In some case a manager or management faced
decision choice of yes or no type.
– We call these “yes-or-no decisions
• In such decisions, the only two possible choices
are yes and no.
• For example,
– Should we undertake a particular project or not?
– Should we make a particular fixed investment or
not?
– Should we locate a facility in a particular site or not
?

119. Cont…
• In this case the decision variables that are
restricted to just two values, say Yes and No:-
– Yes =1 or No=0
– Let X is decision variable which take those values
• The yes-or-no decision would be represented
by, say, Xj such that:

120. Example
• There are four possible projects, which each
run for three years and have the following
characteristics:

121. Cont….
Question 1:-
Which projects would you choose in order
to maximize the total return?

122. Cont…
• We will use a 0 or 1 variables xj for each
project:-
–xj is 1 if we decide to do/select project j
–xj is 0 otherwise (i.e. not do project j)
–This leads to the 0 or 1 programming
problem

123. Formulate Programming Model

124. Discounting Techniques
Net Present Value (NPV)
• This takes into account the time value of money.
• It is based on the principle that money is worth more than it is
in the future.
• The principle exists for two reasons:
124
- Risk – money in the future is uncertain.
- Opportunity cost –could be in an interest account
earning interest.

125. Cont…
• The ARR method of project valuation ignores the
timing of cash flows and the opportunity cost of
capital tied up.
• Pay back considers the time it takes to recover the
original project cost, but ignores total profits over a
project’s life.

126. Cont…
• Discounted cash flow, or DCF for short, is a
project appraisal technique which takes into
account both the time value of money and also
the profitability over a project’s life.
• DCF is therefore superior to both ARR and pay
back as method of project appraisal.

127. 127
Factors leading to the changes in value
of money
• Opportunity cost of money
• Erosion of purchasing power due to inflation
• Uncertainty and
• Risk

128. 128
Opportunity Cost of Money
• Opportunity cost of money refers to the cost
incurred or income forgone by not using the
money for other purpose.
• For surplus cash, the opportunity cost is the
interest income forgone by investing the cash in
other investments or depositing it in the bank.

129. 129
Erosion of Purchasing Power Due to
Inflation
• Inflation refer to the continual increase in the general
price level of goods or services.
• During a period of inflation, prices of goods increase
while the purchasing power of money decrease.
• The purchasing power of a dollar today is greater
than that of the future.

130. 130
Uncertainty and risk
• Investors tend to avoid risk.
• The uncertainty involved in future cash inflows is
much higher than that in present cash inflows.
• If the level of risk rises, investors will expect a higher
return as compensation.
• For example, suppose an investor expects $100 for
return now.
• After adding a 10% risk premium, he will expect
$110 one year later.

131. 131
Discounting
• According to the time value of money concept, a
dollar in one year is not worth the same as a dollar in
anther year.
• In evaluating a multi-year investment, cash inflows
and outflows are generated in different years.
• It is necessary to convert the cash flows for different
years into a common value at a common point of time,
either at present or in the future.

132. Net Present Value
NPV undertaken the following formula:
(1 )
t
o t
t
t
t
F
NPV I
r p
where
F = net cash flow for period t
R = required rate of return
I = initial cash investment
P = inflation rate during period t
 
 

Higher NPV values
are better!
03-132

133. 133
Interpreting the NPV derived as follows
NPVs Comments Reasons
<0 Reject the project The rate of return from the project is
small than the rate of return from an
equivalent risk investment
=0 Indifferent to
accept or reject the
project
The rate of return from the project is
equal to the rate of return from an
equivalent risk investment
>0 Accept the project The rate of return from the project is
greater than the rate of return from
an equivalent risk investment
Highest Accept the project If various project are considered, the
project with highest positive NPV
should be chosen

134. Net Present Value Example
Should you invest $60,000 in a project that will return $15,000 per
year for five years? You have a minimum return of 8% and expect
inflation to hold steady at 3% over the next five years.
Year Net flow Discount NPV
0 -$60,000 1.0000 -$60,000.00
1 $15,000 1.11 $13,513.51
2 $15,000 1.2321 $12,174.34
3 $15,000 1.367631 $10,967.87
4 $15,000 1.518070 $9,880.96
5 $15,000 1.6850581 $8,901.77
-$4,561.54
The NPV
column
total is
negative,
so don’t
invest!

135. Exercise-1
• You are looking at a new project and you have estimated
the following cash flows:
– Year 0: CF = -165,000
– Year 1: CF = 63,120;
– Year 2: CF = 70,800;
– Year 3: CF = 91,080;
• Your required return for assets of this is 12%.
NPV = 63,120/(1.12) + 70,800/(1.12)2 +
91,080/(1.12)3 – 165,000 = 12,627.42
• Do we accept or reject the project?

136. NPV/DCF Exercise
• Should you invest in a short term project that will
cost us $200,000 to launch and will yield these cash
flows (Required Rate of Return= 15%):
136
Cash Flow 0 (Cost) -$200,000.00
Cash Flow 1 $100,000.00
Cash Flow 2 $90,000.00
Cash Flow 3 $70,000.00

137. Profitability Index
• When resources are limited, the profitability
index (PI) provides a tool for selecting among
various project.
• The highest PI can indicate which projects to
select.

138. Cont…
Investment
NPV
Index
ity
Profitabil 

139. Cont…
• Minimum Acceptance Criteria:
– Accept if PI > 1
• Ranking Criteria:
– Select alternative with highest PI

140. Exercise
Which do we select?
Project NPV Investment PI
A 230,000 200,000 1.15
B 141,250 125,000 1.13
C 194,250 175,000 1.11
D 162,000 150,000 1.08

141. Project Cycle
CH-v
The Project cycle
24.05.2023 Prepared by Kedir 141

142. Project Cycle
• The way in which projects are planned and carried
 The cycle starts with the identification of an idea and develops that idea
into a working plan that can be implemented and evaluated.
 Stage on the path from origin to completion
 Stages are generally expressed in terms of cycles and known as
project cycle
Example:
 World bank Project Cycle,
 UNIDO Project Cycle,
 ADB Project Cycle etc.
142
24.05.2023 Prepared by Kedir

143. Traditional project cycle (the Blueprint Approach)
143
Identification
Evaluation Preparation
Implementation Appraisal
Evaluation – added after 1978 and involves ex-post
evaluation
24.05.2023 Prepared by Kedir

144. Cont...
Project
Cycle
1. Identification
2. Pre-Feasibility Study
3. Feasibility Study
4. Appraisal/Approval
5. Implementation
6. Termination
7. Evaluation

145. Project Identification
 Project conception stage.
 Potential project ideas to address public
infrastructure needs/problems/demands

146. Implementation
 During implementation phase, project/program is put
into action.
Example:
 If the project is to related to construct road
 Roads will be contracted and built,
 Project activities will be started and completed,
 Project output will be produced.
 The output of the implementation phase is the new
road
So this is the investment phase of the project.

147. M & E During Programme/Project Period
(National Planning Commission , 2013)
5/24/2023

148. The Process Approach Project Cycle
148
Listening
Piloting
Mainstreaming
Demonstrating
Process Approach of the World Bank has four stages: listening,
piloting , demonstration and mainstreaming
24.05.2023 Prepared by Kedir

149. Cont…
• Listening
 Making the project idea or concept originate
• From local communities and other project beneficiaries
• On the needs and priorities of the community
 Piloting:
• Starting small-scale projects with trials of different
techniques in a holistic approach
149
24.05.2023 Prepared by Kedir

150. Cont…
• Demonstrating:
• Conducting trials on representative scale (eg. village,
kebele ) through joint participation.
• Mainstreaming:
– This is the process of extending the project to a larger scale (eg.
District, region, etc).
24.05.2023 Prepared by Kedir 150

151. United Nations Industrial Development Organization (UNIDO)
Project life Cycle
• Refers to the development process of an industrial investment
project
• Covers from initial idea until the plant is operational.
• Three distinct phases :-
• Pre-investment phase
• Investment phase
• Operational phase
151
24.05.2023 Prepared by Kedir

152. Thank You !!!