ANALYSIS

MEANING OF PROJECT:

The term project has a wider meaning. A project is accomplished by

performing a set of activities. For example, construction of a house is a project.
The construction of a house consists of many activities like digging of
foundation pits, construction of foundation, construction of walls, construction
of roof, fixing of doors and windows, fixing of sanitary fitting, wiring etc.
Another aspect of project is the non-routine nature of activities. Each project is
unique in the sense that the activities of a project are unique and non routine. A
project consumes resources. The resources required for completing a project are
men, material, money and time. Thus, we can define a project as an organized
programme of pre determined group of activities that are non-routine in nature
and that must be completed using the available resources within the given time
limit.
A project consists of a concrete and organized effort motivated by a perceived
opportunity when facing a problem, a need, a desire or a source of discomfort
(e.g., lack of proper ventilation in a building). It seeks the realization of a
unique and innovative deliverable, such as a product, a service, a process, or in
some cases, a scientific research.

Each project has a beginning and an end, and as such is considered a closed
dynamic system. It is developed along the 4 Ps of project management: Plan,
Processes, People, and Power (e.g., line of authority).

CHARACTERISTICS OF PROJECT:
(1) Objectives : A project has a set of objectives or a mission. Once the
objectives are achieved the project is treated as completed.
(2) Life cycle : A project has a life cycle. The life cycle consists of five stages
i.e. conception stage, definition stage, planning & organising stage,
implementation stage and commissioning stage.
(3) Uniqueness : Every project is unique and no two projects are similar.
Setting up a cement plant and construction of a highway ar
e two different projects having unique features.
(4) Team Work : Project is a team work and it normally consists of diverse
areas. There will be personnel specialized in their respective areas and co-
ordination among the diverse areas calls for team work.
(5) Complexity : A project is a complex set of activities relating to diverse
areas.
(6) Risk and uncertainty : Risk and uncertainty go hand in hand with project.
A risk-free, it only means that the element is not apparently visible on the
surface and it will be hidden underneath.
(7) Customer specific nature : A project is always customer specific. It is the
customer who decides upon the product to be produced or services to be offered
and hence it is the responsibility of any organization to go for projects/services
that are suited to customer needs.
(8) Change : Changes occur throughout the life span of a project as a natural
outcome of many environmental factors. The changes may vary from minor
changes, which may have very little impact on the project, to major changes
which may have a big impact or even may change the very nature of the
project.
(9) Optimality : A project is always aimed at optimum utilization of resources
for the overall development of the economy.
(10) Sub-contracting : A high level of work in a project is done through
contractors. The more the complexity of the project, the more will be the extent
of contracting.
(11) Unity in diversity : A project is a complex set of thousands of varieties.
The varieties are in terms of technology, equipment and materials, machinery
and people, work, culture and others.

SEARCH FOR BUINESS IDEA:

Once you have come to the revelation that you are an entrepreneur. Even with
the necessary drive, skills and abilities, many would-be business owners
struggle with finding just the right idea to get behind. There are several really
good techniques and resources to help you discover the business idea for you.

1. Start with a bit of self examination. Discover what your passions are,
what educational background and any skills or expertise you have.

2. Review your own personal needs or desires within the fields of interest
or industries identified in Step 1. Identify a real need of your own and
you may find a relevant need to be filled across the industry.

3. Ask your friends, family and co-workers who share the same interests
what their needs or wants might be within the industries you are
investigating.

4. Go to the library and look through journals and magazines that cover the
industries you want to focus on. Look for business trends that indicate
where the industry is headed. Find out what the “next big thing” is and
you could be the business leader to bring it to market.

5. Research online business sites, such as Inc.com or Entrepreneur.com,

which and offer articles on new business ideas as well as forums to
discuss any new ideas you might have.
 6. Use the feedback you’ve gotten through the previous steps to refine your
list. Drop ideas that don’t have a large enough market or that may be too
costly to start up. Summarize each of your business ideas into a short
phrase and research them on the internet.

PROJECT IDENTIFICATION:

Project identification means a process of finding out the most appropriate

project from among the several investment opportunities According to Dr.
Vasant Desai the project identification is concerned with the collection,
compilation and analysis of economic data for the eventual purpose of locating
possible opportunities for investment.

STEPS IN PROJECT IDENTIFICATION:

Step 1: Identify & Meet with Stakeholders

A stakeholder is anyone who is affected by the results of your project plan.

That includes your customers and end users. Make sure you identify all
stakeholders and keep their interests in mind when creating your project plan.

Step 2: Set & Prioritize Goals

Once you have a list of stakeholder needs, prioritize them and set specific
project goals. These should outline project objectives, or the metrics and
benefits you hope to achieve. Write your goals and the stakeholder needs they
address in your project plan so it's clearly communicated and easily shareable.

Step 3: Define Deliverables

Identify the deliverables and project planning steps required to meet the
project's goals. What are the specific outputs you're expected to produce?
Next, estimate due dates for each deliverable in your project plan. (You can
finalize these dates when you sit down to define your project schedule in the
next step.)

Step 4: Create the Project Schedule

Look at each deliverable and define the series of tasks that must be completed
to accomplish each one. For each task, determine the amount of time it will
take, the resources necessary, and who will be responsible for execution.

Step 5: Identify Issues and Complete a Risk Assessment

No project is risk-free. When developing a project plan, consider the steps you
should take to either prevent certain risks from happening, or limit their
negative impact. Conduct a risk assessment and develop a risk management
strategy to make sure you're prepared.

Step 6: Present the Project Plan to Stakeholders

Make your project plan clear and accessible to all stakeholders so they don’t
have to chase you down for simple updates. makes it easy to track progress,
share updates, and make edits without filling your calendar with meetings.
Communicate clearly. Make sure stakeholders know exactly what's expected of
them, and what actions they need to take.

PROJECT PLANNING:

Project planning is at the heart of the project life cycle, and tells everyone
involved where you’re going and how you’re going to get there. The planning
phase is when the project plans are documented, the project deliverables and
requirements are defined, and the project schedule is created.
 It involves creating a set of plans to help guide your team through the
implementation and closure phases of the project. The plans created during this
phase will help you manage time, cost, quality, changes, risk, and related
issues.

They will also help you control staff and external suppliers to ensure that you
deliver the project on time, within budget, and within schedule.

The purpose of the project planning phase is to:

 Establish business requirements

 Establish cost, schedule, list of deliverables, and delivery dates

 Establish resources plans

 Obtain management approval and proceed to the next phase

Steps In Project Planning are as follows:-

Step 1: Project Goals

As a first step, it is important to identify the stakeholders in your project. It is

not always easy to determine the stakeholders of a project, particularly those
impacted indirectly. Examples of stakeholders are:

 The project sponsor

 The customer who receives the deliverables
 The users of the project output
 The project manager and project team

Once you have established a clear set of goals, they should be recorded in the
project plan. It can be useful also to include the needs and expectations of your
stakeholders.
Now you have completed the most difficult part of the planning process; it's
time to move on and look at the project deliverables.

Step 2: Project Deliverables

Using the goals you have defined in step 1, create a list of things the project
needs to deliver to meet those goals. Specify when and how to deliver each
item.

Add the deliverables to the project plan with an estimated delivery date. You
will establish more accurate delivery dates during the scheduling phase, which
is next.

Step 3: Project Schedule

Create a list of tasks that need to be carried out for each deliverable identified
in step 2. For each task determine the following:

 The amount of effort (hours or days) required for completing the task
 The resource who will carry out the task

Once you have established the amount of effort for each task, you can work out
the effort required for each deliverable, and an accurate delivery date. Update
your deliverables section with the more precise delivery dates.

Step 4: Supporting Plans

This section deals with the plans you should create as part of the planning
process. These can be included directly in the plan.

 Human Resource Plan :-Identify or specify the number and type of

people needed to carry out the project. For each resource detail start
 dates, the estimated duration and the method you will use for obtaining
them.
 Communications Plan :- Create a document showing who is to be
kept informed about the project and how they will receive the
information. The most common mechanism is a weekly or monthly status
report.
 Risk Management Plan :- Risk management is an important part of
project management. It is important to identify as many risks to your
project as possible and be prepared if something bad happens.

Here are some examples of common project risks:

 Time and cost estimate too optimistic

 Customer review and feedback cycle too slow
 Unexpected budget cuts
 Unclear roles and responsibilities
 No stakeholder input obtained
 Not clearly understanding stakeholder needs
 Stakeholders changing requirements after the project has started
 Stakeholders adding new requirements after the project has started
 Poor communication resulting in misunderstandings, quality problems
and rework
 Lack of resource commitment

 Congratulations :- Having followed all the steps above, you should

have a good project plan. Don't forget to update your plan as the project
makes progress, and continually measure progress against the plan.

PROJECT FORMULATION:
 A process is a collection of interrelated actions and activities that take place in
order to achieve a set of previously specified products, results or services. The
project team is in charge of executing the formulation, evaluation and project
management processes. 

The project formulation is a systemic expression of such plan with detailed

estimates within certain parameters. Such estimates in order to be more realistic
and reliable are based on actual experiences, environments along with the
trends forecasted for the coming years. All these are formulated in a ‘project
report’. The project formulation needs lot of functional support from the
specialists in their relevant fields.

Stages of project formulation:-

1. Feasibility Analysis:
First stage in project formulation
Examination to see whether to go in for a detailed investment proposal or not
Screening for internal and external constraints

2. Techno-Economic Analysis
Screens the idea to
 Estimate of potential of the demand of goods/services choice of
optimal technology.
 This analysis gives the project a platform for preparation of detailed
project design

3. Project Design and Network Analysis

It is the heart of the project entity
It defines the sequences of events of the project
Time is allocated for each activity
It is presented in a form of a network drawing
4. Input Analysis
It’s assesses the input requirement during the construction and operation of the project
It defines the inputs required for each activity
Inputs include materials, human resources
It evaluates the feasibility of the project from the point of view the
availability of necessary nresources
This aids in assessing the project cost

5. Financial Analysis:
It involves estimating the project costs, operating cost and fund requirements
It helps in comparing various project proposals on a common scale
Analytical tools used are discounted cash flow, cost-volume-profit
relationship and ratio analysis
Investment decision involve commitment of resources in future, with a long
horizon
It needs caution and foresight in developing financial forecastsCost
 
6. Benefit analysis:
The overall worth of a project is considered
The project design forms the basis of evaluation
It considers costs that all entities have to bear and the benefit connected to it

7. Pre-investment Analysis:
The results obtained in previous stages are consolidated to arrive at clear
conclusions
Helps the project-sponsoring body, the project implementing body and the
external consulting agencies to accept/reject the proposal.
PROJECT ANLAYSIS

Product analysis involves examining product features, costs, availability,

quality and other aspects. Product analysis is conducted by potential buyers, by
product managers attempting to understand competitors and by third party
reviewers.

Product analysis can also be used as part of product design to convert a high-
level product description into project deliverables and requirements. It involves
all facets of the product, its purpose, its operation, and its characteristics.

The project analyst provides critical data support to a technical team. Research

and analysis functions may include budget tracking and financial
forecasting, project evaluation and monitoring, maintaining compliance with
corporate and public regulations, and performing any data analysis relevant
to project tasks.

HOW TO ANALYZE PROJECT:-

Whatever approach you use, the most important thing is to ensure that the
analysis is accurate and relevant, and that it is understood by the people using
the findings, and that results are

available when they are needed.

1. Develop a rough plan for your analytical work:

This is an extension of your monitoring plan. You should try to quickly

determine:

• What questions you want to answer (for example: Did we achieve our
objectives? Did our community education strategy work?)

• What data you will use to answer them

• Who will do it
• When they will do it

• Who will use the results

2. Conduct initial descriptive analyses:

Look at the relevant data sets. For quantitative data, look at the maximum and
minimum values for any given variable and see if they make sense. Calculate
the mean and the standard deviation. If it is appropriate, look at the data in
frequency tables or plot them on a graph. For qualitative data, read or look
through the data. In either case, discuss the results of the descriptive analyses
with members of your team.

3. Refine and improve your data as necessary:

If you find holes or errors in your data, see if you can go back to the original
data source and fill or correct them.

4. Test your assumptions:

Go back to your original results chains and to your goals and objectives. Did
you reach your desired goals and objectives? For example, did the number of
fish increase? Did household incomes increase by 30%? As discussed above,
testing assumptions generally entail making some sort of comparison. For
example, your comparisons might be:

• Comparing your project site to itself over time – For example, decrease in
incidences of poaching within a protected area over a three year period,
increase in wildlife species, reduced vulnerability of local communities to
human/wildlife conflict.

• Comparing one or more sites to others –This could be between

sites/communities within your project or a comparison between a site within
and a site outside a protected area (sometimes referred to as a control group). If
you contribute your project data to larger data sets, you can then compare
across many projects, thus facilitating learning.

• Comparing actual work with planned work -- In other words analysing where
you are in relation to where you thought you would be. This type of comparison
is important to improve your planning ability.

5. Make sense of your results:

Through an analytical process you should not only identify how you are
progressing within your project, but also consider why you have achieved these
results, and determine what needs to happen next. Reflection on activities and
processes complements the analysis of hard data generated through monitoring,
enabling teams to look at the “how” and the “why” not just the “what”; the
relational along with the material and the processes that accompany outcomes.

These need to be explored by considering the results offered by your analysis of

monitoring data in the context of your model, results chains and/or logframe. If
you implemented an activity and the desired impact or outcome did not occur,
there are at least four possibilities to explain what you saw:

1. Your original logic was wrong,

2. Your original logic was correct, but you did a bad job of executing the
activity,

3. Your original logic was correct and you did a good job of executing the
activity, but your monitoring is faulty, or

4. Your original logic was correct, you did a good job of executing the activity,
and your monitoring is fine, but the world changed and a new factor or factors
emerged.

Any one of these (or a combination) can have an impact on elements of your
project. The process of analysis helps the team to recognise these problems and
achieve a greater understanding of what has happened in order to make
decisions and/or management recommendations on how and where changes
need to be made. Similarly where there have been successes it is important to
explore these same areas to pinpoint what were the factors that enabled this
success; otherwise the good practice cannot be replicated or shared with other
partners and stakeholders.

6. Do other exploratory analyses:

In addition to testing your main assumptions, you might also want to take the
opportunity to look at your data and see what other information you might be
able to glean from them. Are there any surprising correlations between
variables?

7. Document your analyses and your findings:

As you go through your analyses, it is good practice to keep track what you are
doing – in effect keeping a laboratory notebook. This record will be useful for
your team when you want to repeat analyses at a later date as more data come
in or when you want to write them up in reports. As existing project staff move
on, it will also help ensure that new project staff have a record of what was
done, what was learned as a result and why, therefore, particular decisions were
taken (thus contributing to an organisational memory). Finally, it becomes the
foundation for learning as discussed in the next step. Good documentation will
include the following: • Brief description of the issue/activity/approach. • What
were the challenges? • What was done? • What has been learned? • What
worked? How? • What could have been done differently? How? • What were
the contributing factors? • What are the next steps and/or management
recommendations in light of your analysis?

8. Share your results :

Once analysis has been completed and documented, these outputs should be
shared with the whole team, partners and stakeholders, along with details of
lessons learned. This will help to ensure a wide understanding of what is
happening within the project, what changes need to happen and why – thus
contributing to buy-in for any changes. Key lessons and recommendations
should also be shared with a wider audience who could learn from your
experience and incorporate good practice and recommendations into their own.

PROJECT SCREENING AND PRESENTATION OF PROJECTS FOR

DECISION MAKING:

Project Screening is an assessment of project applications to select those which

are not suitable for further consideration.

CONDUCTING PROJECT SCREENING

 Project screening includes completing a preliminary examination of the

project opportunity (project application) to obtain an idea of whether the
more time-consuming and costly effort for further business case
development is reasonable.
 Project screening embraces the preliminary indications for decision-
making on pursuing the project opportunities, so the next stage after
screening is the project selection where the most advisable projects are
chosen.

OBJECTIVES:

 To describe different procedures and methods for the conduct of

screening, and to compare their strengths and weaknesses.
 To emphasize the importance of ‘significance’ in screening.

PRIMARY ELEMENTS OF PROJECTSCREENING

  Does this project opportunity make a positive contribution to the overall
portfolio?

Nature of Project Work

 Does this project opportunity represent the application of a core

competency?

Resource Capacity

 Is sufficiently skilled staff /workers available for assignment to this

project opportunity?

Competitive Position

 Is this project opportunity competitive; or perhaps aligned for competitor

selection?

Customer Readiness

 Has the customer validated the need, made funding available, and
established the project opportunity as a priority effort?

SECONDARY ELEMENTS OF PROJECT SCREENING:

 Does this project opportunity provide a business payback in reasonable

time?

Internal Impacts

 Does this project opportunity contribute to business lines and

organizational interests?

Market Position And Market Share

 Does this project opportunity contribute to market position and market

share expansion?
Business Risk

 Does this project opportunity provide more business benefit than

business threat impacts?

DECISION MAKING:

 Decision making is the mental processes resulting in the selection of a

course of action among several alternative scenarios.
 Decision making can be defined as the process of making choices among
possible alternatives.
 Project Decision-making is difficult enough without context challenges,
we must make decisions to act to prevent likely risks, or to ignore them.

How the Decisions are made ?

1. Identify problems or opportunity

2. Choose the best decision style
3. Develop alternative solutions
4. Choose the best solution
5. Implemented the selected alternative
6. Evaluate decision outcomes.

WHY DECISION MAKING IS SO COMPLICATED ?

 Most problems in project management involve multiple objectives

 Project managers are always dealing with uncertainties
 Project management problems may be very complex
 Most projects include multiple stakeholders

SOCIO-ECONOMIC CONSIDERATION IN PROJECT

FORMULATION
Socio-economic factors:
1. People's priorities

If the objective of rainwater harvesting projects is to assist resource-poor

farmers to improve their production systems, it is important that the
farmer's/agropastoralist's priorities are being fulfilled, at least in part. Otherwise
success is unlikely. If the local priority is drinking water supply, for example,
the response to water harvesting systems for crop production will be poor.

2. Participation

It is becoming more widely accepted that unless people are actively involved in
the development projects which are aimed to help them, the projects are
doomed to failure. It is important that the beneficiaries participate in every
stage of the project. When the project is being planned, the people should be
consulted, and their priorities and needs assessed. During the construction
phase the people again should be involved -supplying labour but also helping
with field layouts after being trained with simple surveying instruments.

Throughout the course of the season it is helpful to involve people in

monitoring, such as rainfall and runoff and recording tree mortality. A further
participatory role is in maintenance, which should not be supported by
incentives.

After the first season it is the farmers themselves who will often have the best
ideas of modifications that could be made to the systems. In this way they are
involved in evaluation, and in the evolution of the water harvesting systems.

3 Adoption of systems

Widespread adoption of water harvesting techniques by the local population is

the only way that significant areas of land can be treated at a reasonable cost on
a sustainable basis. It is therefore important that the systems proposed are
simple enough for the people to implement and to maintain. To encourage
adoption, apart from incentives in the form of tools for example, there is a need
for motivational campaigns, demonstrations, training and extension work.

4 Area differences

It is tempting to assume that a system which works in one area will also work in
another, superficially similar, zone. However there may be technical
dissimilarities such as availability of stone or intensity of rainfall, and distinct
socio-economic differences also. For example a system which is best adapted to
hand construction may not be attractive to people who normally till with
animals. If a system depends on a crop well accepted in one area - sorghum for
example - this may be a barrier to acceptance where maize is the preferred food
grain.

5 Gender and equity

If water harvesting is intended to improve the lot of farmers in the poorer, drier
areas, it is important to consider the possible effects on gender and equity. In
other words, will the introduction of water harvesting be particularly
advantageous to one group of people, and exclude others? Perhaps water
harvesting will give undue help to one sex, or to the relatively richer
landowners in some situations. These are points a projects should bear in mind
during the design stage. There is little point in providing assistance which only
benefits the relatively wealthier groups.

6 Land tenure

Land tenure issues can have a variety of influences on water harvesting

projects. On one hand it may be that lack of tenure means that people are
reluctant to invest in water harvesting structures on land which they do not
formally own. Where land ownership and rights of use are complex it may be
difficult to persuade the cultivator to improve land that someone else may use
later. On the other hand there are examples of situations where the opposite is
the case - in some areas farmers like to construct bunds because it implies a
more definite right of ownership.

The most difficult situation is that of common land, particularly where no well
defined management tradition exists. Villagers are understandably reluctant to
treat areas which are communally grazed - a point taken up in the next section.

7 Village land use management

The whole question of land management by village communities has recently

been acknowledged to be extremely important. Degraded land in and around
villages can only be improved if land use management issues are faced by the
communities themselves. One of the techniques which can assist in
rehabilitation of degraded land is water harvesting - but it is only one tool
among several others and cannot be effective in isolation. Unless, for example,
grazing controls are implemented, there is little point spending money on water
harvesting structures for re-seeding.

PROJECT MANAGEMENT:

Project management is the planning, organizing and managing the effort to

accomplish a successful project. A project is a one-time activity that produces
a specific output and or outcome, for example, a building or a major new
computer system. This is in contrast to a program, (referred to a 'programme'
in the UK) which is 1) an ongoing process, such as a quality control program,
or 2) an activity to manage a number of multiple projects together.
Project management includes developing a project plan, which
involves defining and confirming the project goals and objectives, how
they will be achieved, identifying tasks and quantifying the resources needed,
and determining budgets and timelines for completion. It also includes
managing the implementation of the project plan, along with operating regular
'controls' to ensure that there is accurate and objective information on
'performance' relative to the plan, and the mechanisms to implement
recovery actions where necessary.

Project management is the practice of initiating, planning, executing,

controlling, and closing the work of a team to achieve specific goals and meet
specific success criteria at the specified time.In project management a project
consists of a temporary endeavor undertaken to create a unique product, service
or result with a defined beginning and undertaken to meet unique goals and
objectives, typically to bring about beneficial change or added value.

Another definition is: a management environment that is created for the

purpose of delivering one or more business products according to a specified
business case. Projects can also be seen as temporary organization.

Project objectives define target status at the end of the project, reaching of
which is considered necessary for the achievement of planned benefits. They
can be formulated as SMART criteria;

 Specific
 Measurable (or at least evaluable) achievement
 Achievable (recently Agreed to or Acceptable are used [by whom?] regularly
as well)
 Realistic (given the current state of organizational resources)
 Time terminated (bounded)
 The evaluation (measurement) occurs at the project closure. However a
continuous guard on the project progress should be kept by monitoring and
evaluating.

PROJECT MANAGEMENT CYCLE:

1. Project Initiation

Initiation is the first phase of the project lifecycle. This is where the project’s
value and feasibility are measured. Project managers typically use two
evaluation tools to decide whether or not to pursue a project:

o Business Case Document – This document justifies the need for the
project, and it includes an estimate of potential financial benefits.

o Feasibility Study – This is an evaluation of the project’s goals, timeline

and costs to determine if the project should be executed. It balances the
requirements of the project with available resources to see if pursuing the
project makes sense.

Teams abandon proposed projects that are labeled unprofitable and/or

unfeasible. However, projects that pass these two tests can be assigned to a
project team or designated project office.

2. Project Planning

Once the project receives the green light, it needs a solid plan to guide the team,
as well as keep them on time and on budget. A well-written project plan gives
guidance for obtaining resources, acquiring financing and procuring required
materials. The project plan gives the team direction for producing quality
outputs, handling risk, creating acceptance, communicating benefits to
stakeholders and managing suppliers.
The project plan also prepares teams for the obstacles they might encounter
over the course of the project, and helps them understand the cost, scope and
timeframe of the project.

3. Project Execution

This is the phase that is most commonly associated with project management.
Execution is all about building deliverables that satisfy the customer. Team
leaders make this happen by allocating resources and keeping team members
focused on their assigned tasks.

Execution relies heavily on the planning phase. The work and efforts of the
team during the execution phase are derived from the project plan.

4. Project Monitoring and Control

Monitoring and control are sometimes combined with execution because they
often occur at the same time. As teams execute their project plan, they must
constantly monitor their own progress.

To guarantee delivery of what was promised, teams must monitor tasks to

prevent scope creep, calculate key performance indicators and track variations
from allotted cost and time. This constant vigilance helps keep the project
moving ahead smoothly.

5. Project Closure

Teams close a project when they deliver the finished project to the customer,
communicating completion to stakeholders and releasing resources to other
projects. This vital step in the project lifecycle allows the team to evaluate and
document the project and move on the next one, using previous project
mistakes and successes to build stronger processes and more successful teams.
 Unit 3

5 Methods of Project Appraisal

1. Economic Analysis:
Under economic analysis, the project aspects highlighted include requirements
for raw material, level of capacity utilization, anticipated sales, anticipated
expenses and the probable profits. It is said that a business should have always
a volume of profit clearly in view which will govern other economic variables
like sales, purchases, expenses and alike.

It will have to be calculated how much sales would be necessary to earn the
targeted profit. Undoubtedly, demand for the product will be estimated for
anticipating sales volume. Therefore, demand for the product needs to be
carefully spelled out as it is, to a great extent, deciding factor of feasibility of
the project concern.

In addition to above, the location of the enterprise decided after considering a

gamut of points also needs to be mentioned in the project. The Government
policies in this regard should be taken into consideration. The Government
offers specific incentives and concessions for setting up industries in notified
backward areas. Therefore, it has to be ascertained whether the proposed
enterprise comes under this category or not and whether the Government has
already decided any specific location for this kind of enterprise.

2. Financial Analysis:
Finance is one of the most important pre-requisites to establish an enterprise. It
is finance only that facilitates an entrepreneur to bring together the labour of
one, machine of another and raw material of yet another to combine them to
produce goods.

In order to adjudge the financial viability of the project, the following

aspects need to be carefully analysed:
1. Assessment of the financial requirements both – fixed capital and working
capital need to be properly made. You might be knowing that fixed capital
normally called ‘fixed assets’ are those tangible and material facilities which
purchased once are used again and again. Land and buildings, plants and
machinery, and equipment’s are the familiar examples of fixed assets/fixed
capital. The requirement for fixed assets/capital will vary from enterprise to
enterprise depending upon the type of operation, scale of operation and time
when the investment is made. But, while assessing the fixed capital
requirements, all items relating to the asset like the cost of the asset, architect
and engineer’s fees, electrification and installation charges (which normally
come to 10 per cent of the value of machinery), depreciation, pre-operation
expenses of trial runs, etc., should be duly taken into consideration. Similarly, if
any expense is to be incurred in remodeling, repair and additions of buildings
should also be highlighted in the project report.

2. In accounting, working capital means excess of current assets over current

liabilities. Generally, 2: 1 is considered as the optimum current ratio. Current
assets refer to those assets which can be converted into cash within a period of
one week. Current liabilities refer to those obligations which can be payable
within a period of one week. In short, working capital is that amount of funds
which is needed in day today’s business operations. In other words, it is like
circulating money changing from cash to inventories and from inventories to
receivables and again converted into cash.
This circle goes on and on. Thus, working capital serves as a lubricant for any
enterprise, be it large or small. Therefore, the requirements of working capital
should be clearly provided for. Inadequacy of working capital may not only
adversely affect the operation of the enterprise but also bring the enterprise to a
grinding halt.

The activity level of an enterprise expressed as capacity utilization, needs to be

well spelt out in the business plan or project report. However, the enterprise
sometimes fails to achieve the targeted level of capacity due to various business
vicissitudes like unforeseen shortage of raw material, unexpected disruption in
power supply, inability to penetrate the market mechanism, etc.

Then, a question arises to what extent and enterprise should continue its
production to meet all its obligations/liabilities. ‘Break-even analysis’ (BEP)
gives an answer to it. In brief, break-even analysis indicates the level of
production at which there is neither profit nor loss in the enterprise. This level
of production is, accordingly, called ‘break-even level’.

3. Market Analysis:
Before the production actually starts, the entrepreneur needs to anticipate the
possible market for the product. He/she has to anticipate who will be the
possible customers for his product and where and when his product will be
sold. There is a trite saying in this regard: “The manufacturer of an iron nails
must know who will buy his iron nails.”

This is because production has no value for the producer unless it is sold. It is
said that if the proof of pudding lies in eating, the proof of all production lies in
marketing/ consumptio. In fact, the potential of the market constitutes the
determinant of probable rewards from entrepreneurial career.
Thus, knowing the anticipated market for the product to be produced becomes
an important element in every business plan. The various methods used to
anticipate the potential market, what is named in ‘Managerial Economics’ as
‘demand forecasting’, range from the naive to sophisticated ones.

The commonly used methods to estimate the demand for a product are as
follows:
1. Opinion Polling Method:
In this method, the opinions of the ultimate users, i.e. customers of the product
are estimated. This may be attempted with the help of either a complete survey
of all customers (called, complete enumeration) or by selecting a few
consuming units out of the relevant population (called, sample survey).

ADVERTISEMENTS:

Let us discuss these in some details:

(a) Complete Enumeration Survey:
In this survey, all the probable customers of the product are approached and
their probable demands for the product are estimated and then summed.
Estimating sales under this method is very simple. It is obtained by simply
adding the probable demands of all customers. An example should make it
clear.

Suppose, there are total N customers of X product and everybody will demand
for D numbers of it. Then, the total anticipated demand will be:

N ∑ i=1 DiN
Though the principle merit of this method is that it obtains the first-hand and
unbiased information, yet it is beset with some disadvantages also. For
example, to approach a large number of customers scattered all over market
becomes tedious, costly and cumbersome. Added to this, the consumers
themselves may not divulge their purchase plans due to the reasons like their
personal as well commercial/business privacies.

(b) Sample Survey:
Under this method, only some number of consumers out of their total
population is approached and data on their probable demands for the product
during the forecast period are collected and summed. The total demand of
sample customers is finally blown up to generate the total demand for the
product. Let this also be explained with an example.

Imagine, there are 1000 customers of a product spread over the Faridabad
market. Out of these, 50 are selected for survey using stratified method. Now, if
the estimated demand of these sample customers is D i, i.e., it refers to 1 2
3….50, the total demand for the entire group of customers will be
50 ∑ ni Di = n1 D1 +n2D2 + n3 D3…….. n50 D50
Where n, is the number of customers in group i, and n1 +n2 + n3….n50 = 1000.
But, if all the 1000 customers of the group are alike, then the selection may be
done on a random basis and total demand for the group will be:

(D1 D2 + D3 +D4…D5) 1000 /50

No doubt, survey method is less costly and tedious than the complete
enumeration method.

(c) Sales Experience Method:

Under this method, a sample market is surveyed before the new product is
offered for sale. The results of the market surveyed are then projected to the
universe in order to anticipate the total demand for the product.

In principle, the survey market should be the true representative of the national
market which is not always true. Suppose, if Delhi is selected as a sample
market, it may not be a true representative of a small place, say Silchar in
Assam simply because the characteristic features of Delhi are altogether
different from those of a small town like Silchar.

Again, if we select Agra as a sample market, sales in Agra would be influenced

by the size of the floating tourist’s population throughout the year. But this
feature is not experienced by many other places again like Silchar in Assam.

(d) Vicarious Method:
Under the vicarious method, the consumers of the product are not approached
directly but indirectly through some dealers who have a feel of their customers.
The dealers’ opinions about the customers’ opinion are elicited. Being based on
dealers’ opinions, the method is bound to suffer from the bias on the part of the
dealers. Then, the results derived are likely to be unrealistic. However, these
hang-ups are not avoidable also.

2. Life Cycle Segmentation Analysis:

It is well established that like a man, every product has its own life span. In
practice, a product sells slowly in the beginning. Backed by sales promotion
strategies over period, its sales pick up. In the due course of time, the peak sale
is reached. After that point, the sales begin to decline. After, some time, the
product loses its demand and dies. This is natural death of a product. Thus,
every product passes through its ‘life cycle’. This is precisely the reason why
firms go for new products one after another to keep themselves alive.

Based on above, the product life cycle has been divided into the following
five stages:
1. Introduction

2. Growth

3. Maturity
4. Saturation

5. Decline

The sales of the product vary from stage to stage and follows S-shaped
curve as shown in Figure 16.1:

Considering the above five stages of a product life cycle, the sales at different
stages can be anticipated.

4. Technical Feasibility:
While making project appraisal, the technical feasibility of the project also
needs to be taken into consideration. In the simplest sense, technical feasibility
implies to mean the adequacy of the proposed plant and equipment to produce
the product within the prescribed norms. As regards know-how, it denotes the
availability or otherwise of a fund of knowledge to run the proposed plants and
machinery.

It should be ensured whether that know-how is available with the entrepreneur

or is to be procured from elsewhere. In the latter case, arrangement made to
procure it should be clearly checked up. If project requires any collaboration,
then, the terms and conditions of the collaboration should also be spelt out
comprehensively and carefully.

In case of foreign technical collaboration, one needs to be aware of the legal

provisions in force from time to time specifying the list of products for which
only such collaboration is allowed under specific terms and conditions. The
entrepreneur, therefore, contemplating for foreign collaboration should check
these legal provisions with reference to their projects.

While assessing the technical feasibility of the project, the following inputs
covered in the project should also be taken into consideration:
(i) Availability of land and site.

(ii) Availability of other inputs like water, power, transport, communication

facilities.

(iii) Availability of servicing facilities like machine shops, electric repair shop,
etc.

(iv) Coping-with anti-pollution law.

(v) Availability of work force as per required skill and arrangements proposed
for training-in-plant and outside.

(vi) Availability of required raw material as per quantity and quality.

5. Management Competence:
Management ability or competence plays an important role in making an
enterprise a success or otherwise. Strictly speaking, in the absence of
managerial competence, the projects which are otherwise feasible may fail.

On the contrary, even a poor project may become a successful one with good
managerial ability. Hence, while doing project appraisal, the managerial
competence or talent of the promoter should be taken into consideration.

Research studies report that most of the enterprises fall sick because of lack of
managerial competence or mismanagement. This is more so in case of small-
scale enterprises where the proprietor is all in all, i.e., owner as well as
manager. Due to his one-man show, he may be jack of all but master of none.

Social cost benefit analysis (SCBA)

A social cost benefit analysis is a systematic and cohesive method to survey all
the impacts caused by an (urban) development project or other policy measure.
It comprises not just the financial effects (investment costs, direct benefits like
profits, taxes and fees, et cetera), but all the societal effects, like: pollution,
environment, safety, travel times, spatial quality, health, indirect (i.e. labour or
real estate) market impacts, legal aspects, et cetera. The main aim of a social
cost benefit analysis is to attach a price to as many effects as possible in order
to uniformly weigh the above-mentioned heterogeneous effects. As a result,
these prices reflect the value a society attaches to the caused effects, enabling
the decision maker to form an opinion about the net social welfare effects of a
project.

Compare different project alternatives

A major advantage of a social cost benefit analysis is that it enables investors
(mostly public parties) to systematically and cohesively compare different
project alternatives. Hence, these alternatives will not just be compared
intrinsically, but will also be set against the “null alternative hypothesis”. This
hypothesis describes “the most likely” scenario development in case a project
will not be executed. Put differently, investments on a smaller scale will be
included in the null alternative hypothesis in order to make a realistic
comparison in a situation without “huge” investments.

Calculate direct, indirect and external effects

The social cost benefit analysis calculates the direct (primary), indirect
(secondary) and external effects:
 Direct effects are the costs and benefits that can be directly linked to the
owners/users of the project properties (e.g., the users and the owner of a
building, recreational area, wind energy park, or highway).
 Indirect effects are the costs and benefits that are passed on to the
producers and consumers outside the market with which the project is
involved (e.g., the owner of a bakery nearby the new building, or a business
company located near the newly planned highway, recreational area,
indirect tax incomes, etc.).
 External effects are the costs and benefits that cannot be passed on to any
existing markets because they relate to issues like the environment (noise,
emission of CO2, etc.), safety (traffic, external security) and nature
(biodiversity, dehydration, etc.).

Monetizing effects
As model engineers, we at Decisio try to quantify and monetize as much effects
as possible. Effects that cannot be monetized are presented in a such a way that
they can be compared. This way, policymakers can include these effects in their
final judgment if an urban planning project (or a particular variation) is worth
investing in, which components of the project are causing positive or negative
impacts on society and how costs and benefits are divided amongst
stakeholders. The method of monetizing effects can also influence the outcome
of a social cost benefit analysis and predictions will always remain uncertain.
Therefore, the results of a social cost benefit analysis are not absolute.
Nevertheless, it is a good instrument to investigate the strong and weak points
of the different alternatives. We also always give insights in the impact of
changes in the most influential assumptions to stress the robustness of
outcomes.

The result of a social cost benefit analysis

The result of a social cost benefit analysis are:
 An integrated way of comparing the different effects. All relevant costs
and benefits of the different project implementations (alternatives) are
identified and monetized as far as possible. Effects that cannot be
monetized are described and quantified as much as possible.
 Attention for the distribution of costs and benefits. The benefits of a
project do not always get to the groups bearing the costs. A social cost
benefit analysis gives insight in who bears the costs and who derives the
benefits.
 Comparison of the project alternatives. A social cost benefit analysis is a
good method to show the differences between project alternatives and
provides information to make a well informed decision.
 Presentation of the uncertainties and risks. A social cost benefit analysis
has several methods to take economic risks and uncertainties into account.
The policy decision should be based on calculated risk.

Risk analysis

Risk is made up of two parts: the probability of something going wrong, and
the negative consequences if it does.

Risk can be hard to spot, however, let alone prepare for and manage. And, if
you're hit by a consequence that you hadn't planned for, costs, time, and
reputations could be on the line.

This makes Risk Analysis an essential tool when your work involves risk. It can
help you identify and understand the risks that you could face in your role. In
turn, this helps you manage these risks, and minimize their impact on your
plans.
What Is Risk Analysis?

Risk Analysis is a process that helps you identify and manage potential
problems that could undermine key business initiatives or projects.

To carry out a Risk Analysis, you must first identify the possible threats that
you face, and then estimate the likelihood that these threats will materialize.

Risk Analysis can be complex, as you'll need to draw on detailed information

such as project plans, financial data, security protocols, marketing forecasts,
and other relevant information. However, it's an essential planning tool, and one
that could save time, money, and reputations.

When to Use Risk Analysis

Risk analysis is useful in many situations:

 When you're planning projects, to help you anticipate and neutralize

possible problems.

 When you're deciding whether or not to move forward with a project.

 When you're improving safety and managing potential risks in the

workplace.

 When you're preparing for events such as equipment or technology

failure, theft, staff sickness, or natural disasters.

 When you're planning for changes in your environment, such as new

competitors coming into the market, or changes to government policy.

How to Use Risk Analysis

To carry out a risk analysis, follow these steps:

1. Identify Threats

The first step in Risk Analysis is to identify the existing and possible threats
that you might face. These can come from many different sources. For instance,
they could be:

 Human – Illness, death, injury, or other loss of a key individual.

 Operational – Disruption to supplies and operations, loss of access to

essential assets, or failures in distribution.

 Reputational – Loss of customer or employee confidence, or damage to

market reputation.

 Procedural – Failures of accountability, internal systems, or controls, or

from fraud.

 Project – Going over budget, taking too long on key tasks, or

experiencing issues with product or service quality.

 Financial – Business failure, stock market fluctuations, interest rate

changes, or non-availability of funding.

 Technical – Advances in technology, or from technical failure.

 Natural – Weather, natural disasters, or disease.

 Political – Changes in tax, public opinion, government policy, or foreign

influence.

 Structural – Dangerous chemicals, poor lighting, falling boxes, or any

situation where staff, products, or technology can be harmed.
You can use a number of different approaches to carry out a thorough analysis:

 Run through a list such as the one above to see if any of these threats are
relevant.

 Think about the systems, processes, or structures that you use, and
analyze risks to any part of these. What vulnerabilities can you spot within
them?

 Ask others who might have different perspectives. If you're leading a

team, ask for input from your people, and consult others in your
organization, or those who have run similar projects.

Tools such as SWOT Analysis  and Failure Mode and Effects Analysis  can

also help you uncover threats, while Scenario Analysis   helps you explore
possible future threats.

2. Estimate Risk

Once you've identified the threats you're facing, you need to calculate out both
the likelihood of these threats being realized, and their possible impact.

One way of doing this is to make your best estimate of the probability of the
event occurring, and then to multiply this by the amount it will cost you to set
things right if it happens. This gives you a value for the risk:

Risk Value = Probability of Event x Cost of Event

As a simple example, imagine that you've identified a risk that your rent may
increase substantially.

You think that there's an 80 percent chance of this happening within the next
year, because your landlord has recently increased rents for other businesses. If
this happens, it will cost your business an extra $500,000 over the next year.
So the risk value of the rent increase is:

0.80 (Probability of Event) x $500,000 (Cost of Event) = $400,000 (Risk

Value)
You can also use a Risk Impact/Probability Chart  to assess risk. This will
help you to identify which risks you need to focus on.
Tip:
Don't rush this step. Gather as much information as you can so that you can
accurately estimate the probability of an event occurring, and the associated
costs. Use past data as a guide if you don't have an accurate means of
forecasting.

How to Manage Risk

Once you've identified the value of the risks you face, you can start to look at
ways of managing them.

Tip:
Look for cost-effective approaches – it's rarely sensible to spend more on
eliminating a risk than the cost of the event if it occurs. It may be better to
accept the risk than it is to use excessive resources to eliminate it.
Be sensible in how you apply this, though, especially if ethics or personal
safety are in question.

1. Avoid the RiskIn some cases, you may want to avoid the risk
altogether. This could mean not getting involved in a business
venture, passing on a project, or skipping a high-risk activity. This is a
good option when taking the risk involves no advantage to your
organization, or when the cost of addressing the effects is not
worthwhile.
Remember that when you avoid a potential risk entirely, you might miss
out on an opportunity. Conduct a "What If?" Analysis   to explore your
options when making your decision.

2. Share the RiskYou could also opt to share the risk – and the potential
gain – with other people, teams, organizations, or third parties.
For instance, you share risk when you insure your office building and
your inventory with a third-party insurance company, or when you
partner with another organization in a joint product development
initiative.

3. Accept the RiskYour last option is to accept the risk. This option is
usually best when there's nothing you can do to prevent or mitigate a
risk, when the potential loss is less than the cost of insuring against
the risk, or when the potential gain is worth accepting the risk.
For example, you might accept the risk of a project launching late if the
potential sales will still cover your costs.
Before you decide to accept a risk, conduct an Impact Analysis  to see
the full consequences of the risk. You may not be able to do anything
about the risk itself, but you can likely come up with a contingency
plan  to cope with its consequences.

4. Control the RiskIf you choose to accept the risk, there are a number
of ways in which you can reduce its impact.
1.Business Experiments  are an effective way to reduce risk. They
involve rolling out the high-risk activity but on a small scale, and in a
controlled way. You can use experiments to observe where problems
occur, and to find ways to
 introduce preventative and detective actions before you introduce the
activity on a larger scale.

 Preventative action involves aiming to prevent a high-risk situation

from happening. It includes health and safety training, firewall
protection on corporate servers, and cross-training your team.
 Detective action involves identifying the points in a process where
something could go wrong, and then putting steps in place to fix the
problems promptly if they occur. Detective actions include double-
checking finance reports, conducting safety testing before a product is
released, or installing sensors to detect product defects.

2.Plan-Do-Check-Act   is a similar method of controlling the impact of a risky

situation. Like a Business Experiment, it involves testing possible ways
toreduce a risk. The tool's four phases guide you through an analysis of the
situation, creating and testing a solution, checking how well this worked, and
implementing the solution.

What are 'Risk Measures'

Risk measures are statistical measures that are historical predictors of

investment risk and volatility, and they are also major components in modern
portfolio theory (MPT). MPT is a standard financial and academic
methodology for assessing the performance of a stock or a stock fund as
compared to its benchmark index.

'Risk Measures'
There are five principal risk measures, and each measure provides a unique way
to assess the risk present in investments that are under consideration. The five
measures include the alpha, beta, R-squared, standard deviation and Sharpe
ratio. Risk measures can be used individually or together to perform a risk
assessment. When comparing two potential investments, it is wise to compare
like for like in order to determine which investment holds the most risk.

Alpha

Alpha measures risk relative to the market or a selected benchmark index. For
example, if the S&P 500 has been deemed the benchmark for a particular fund,
the activity of the fund would be compared to that experienced by the selected
index. If the fund outperforms the benchmark, it is said to have a positive alpha.
If the fund falls below the performance of the benchmark, it is considered to
have a negative alpha.

Beta

Beta measures the volatility or systemic risk of a fund in comparison to the

market or the selected benchmark index. A beta of one indicates the fund is
expected to move in conjunction with the benchmark. Betas below one are
considered less volatile than the benchmark, while those over one are
considered more volatile than the benchmark.

R-Squared

R-Squared measures the percentage of an investment's movement that is

attributable to movements in its benchmark index. An R-squared value
represents the correlation between the examined investment and its associated
benchmark. For example, an R-squared value of 95 would be considered to
have a high correlation, while an R-squared value of 50 may be considered low.
The U.S. Treasury Bill functions as a benchmark for fixed-income securities,
while the S&P 500 Index functions as a benchmark for equities.

Standard Deviation

Standard deviation is a method of measuring data dispersion in regards to the

mean value of the dataset and provides a measurement regarding an
investment’s volatility. As it relates to investments, the standard deviation
measures how much return on an investment is deviating from the expected
normal or average returns.

Sharpe Ratio

The Sharpe ratio measures performance as adjusted by the associated risks.

This is done by removing the rate of return on a risk-free investment, such as a
U.S. Treasury Bond, from the experienced rate of return. This is then divided
by the associated investment’s standard deviation and serves as an indicator of
whether an investment's return is due to wise investing or due to the assumption
of excess risk.

Example of Risk Measures

Most mutual funds will calculate the risk measures for investors. A
conservative fund, the T. Rowe Price Capital Appreciation Fund offers
investors a beta of 0.62 as of March 31, 2018, meaning it is significantly less
volatile than the benchmark S&P 500 index. Its R-squared value is 0.90, which
indicates close correlation with the benchmark. The fund lists a standard
deviation of 6.60. This means investors can expect the returns of the fund to
vary 6.6% from its average return of 11.29%. 
Compare this large-cap fund to a high-risk small-cap fund, the HSBC Small-
Cap Equity Fund. Its risk measures indicate high volatility, with a beta of 1.17,
R-squared of 85.56, Sharpe ratio of 0.65 and standard deviation of 19.88%

SENSITIVITY ANALYSIS:
A sensitivity analysis determines how different values of an independent
variable affect a particular dependent variable under a given set of assumptions.
This technique is used within specific boundaries that depend on one or more
input variables, such as the effect that changes in interest rates (independent
variable) has on bond prices (dependent variable).

Sensitivity analysisis also referred to as "what-if" or simulation analysis and is

a way to predict the outcome of a decision given a certain range of variables.
By creating a given set of variables, an analyst can determinehow changes in
one variable affect the outcome.

Sensitivity Analysis Example

Assume Sue, a sales manager, wants to understand the impact of customer
traffic on total sales. She determines that sales are a function of price and
transaction volume. The price of a widget is $1,000, and Sue sold 100 last year
for total sales of $100,000. Sue also determines that a 10% increase in customer
traffic increases transaction volume by 5%, which allows her to build
a financial model and sensitivity analysis around this equation based on what-if
statements. It can tell her what happens to sales if customer traffic increases by
10%, 50% or 100%. Based on 100 transactions today, a 10%, 50% or 100%
increase in customer traffic equates to an increase in transactions by 5%, 25%
or 50%, respectively. The sensitivity analysis demonstrates that sales are highly
sensitive to changes in customer traffic.

THE PURPOSE OF SENSITIVITY ANALYSIS: Sensitivity analysis is a

technique for investigating the impact of changes in project variables on the
base-case (most probable outcome scenario). Typically, only adverse changes
are considered in sensitivity analysis. The purpose of sensitivity analysis is:
1. to help identify the key variables which influence the project cost and benefit
streams
2. to investigate the consequences of likely adverse changes in these key
variables
3. to assess whether project decisions are likely to be affected by such changes
4. to identify actions that could mitigate possible adverse effects on the project.

PERFORMANCE OF SENSITIVITY ANALYSISSensitivity analysis needs

to be realized in a systematic manner. To meet the above purposes, the
following steps are recommended to be followed:
1. identify key variables to which the project decision may be sensitive
2. calculate the effect of likely changes in these variables on the base-case IRR
or NPV, and calculate a sensitivity indicator and/or switching value
3. consider possible combinations of variables that may change simultaneously
in an adverse direction
4. analyze the direction and scale of likely changes for the key variables
identified, involving identification of the sources of change.

Step 1: Identifying the key variables. The base case project economic
analysis incorporates many variables: quantities and their inter-relationships,
prices or economic values and the timing of project effects. Some of these
variables will be predictable or relatively small in value in the project context.
It is not necessary to investigate the sensitivity of the measures of project worth
to such variables. Other variables may be less predictable or larger in value.
Variables related to sectorial policy and capacity building may also be
important. As they are more difficult to quantify, they are not further
considered hereafter but should be assessed in a qualitative manner. Project
Risk Evaluation Methods - Sensitivity Analysis 35 As a result of previous
experience (from post-evaluation studies) and analysis of the project context, a
preliminary set of likely key variables can be chosen on the following basis:
1. variables which are numerically large, ex. investment cost
2. essential variables, which may be small, but the value of which is very
important for the design of the projectt
3. variables occurring early in the project life, ex. investment costs and initial
fixed operating costs, which will be relatively unaffected by discounting
4. variables affected by economic changes, such as, changes in real income.

Step 2 and 3: Calculation of effects of changing variables.The values of the

basic indicators of project viability (EIRR and ENPV) should be recalculated
for different values of key variables. This is preferably done by calculating
sensitivity indicators and switching values. The meaning of these concepts is
presented in table 2 as well as a sample calculation.

The switching value is, by definition, the reciprocal of the sensitivity indicator.
Sensitivity indicators and switching values calculated towards the IRR yield
slightly different results if compared to Sis and SVs calculated towards the
NPV. This is Project Risk Evaluation Methods - Sensitivity Analysis 37
because IRR approach discounts all future net benefits at the IRR value and the
NPV approach at the discount rate d. In the base case, the ENPV is 126 and the
EIRR is 13.7 percent. The sensitivity of the base case ENPV has been analyzed
for (adverse) changes in several key variables, as follows:
1. an increase in investment cost by 20 percent
2. a decrease in economic benefits by 20 percent
3. an increase in costs of operation and maintenance by 20 percent
4. a delay in the period of construction, causing a delay in revenue generation
by one year

Proposed changes in key variables should be well explained. The sensitivity

analysis should be based on the most likely changes.

Step 4: Analysis of effects of changes in key variables.In the case of an

increase in investment costs of 20 percent, the sensitivity indicator is 13.34.
This means that the change of 20 percent in the variable (investment cost)
results in a change of 266 percent in the ENPV. It follows that the higher the SI,
the more sensitive the NPV is th change in the concerned variable. In the same
example, the switching value is 7.5 percent which is the reciprocal value of the
SI x 100. This means that a change (increase) of 7.5 percent in the key variable
(investment cost) will cause the ENPV to become zero. The lower the SV, the
more sensitive the NPV is to the change in the variable concerned and the
higher the risk with the project. At this point the results of the sensitivity
analysis should be reviewed. It should be asked: 1. Which are the variables with
high sensitivity indicators; 2. How likely are the (adverse) changes (as indicated
by the switching value) in the values of the variables that would alter the
project decision? 38 Iloiu, M.; Csiminga, D.

CONCLUSIONS The paper presents two concepts: sensitivity indicator and

switching value, used to perform a sensitivity analysis as well as the meaning of
them. Sensitivity indicators and switching values are calculated for the NPV
and IRR, as we can see in the numerical example, so we can analyze the effects
of changes in key variable and minimize the project risk.

Decision Tree Analysis

Definition: The Decision Tree Analysis is a schematic representation of

several decisions followed by different chances of the occurrence. Simply, a
tree-shaped graphical representation of decisions related to the investments and
the chance points that help to investigate the possible outcomes is called as a
decision tree analysis.

The decision tree shows Decision Points, represented by squares, are the
alternative actions along with the investment outlays, that can be
undertaken for the experimentation. These decisions are followed by the
chance points, represented by circles, are the uncertain points, where the
outcomes are dependent on the chance process. Thus, the probability of
occurrence is assigned to each chance point.

A decision tree typically starts with a single node, which branches into possible
outcomes. Each of those outcomes leads to additional nodes, which branch off
into other possibilities. This gives it a treelike shape.

There are three different types of nodes: chance nodes, decision nodes, and end
nodes. A chance node, represented by a circle, shows the probabilities of
certain results. A decision node, represented by a square, shows a decision to be
made, and an end node shows the final outcome of a decision path.
Once the decision tree is described precisely, and the data about outcomes
along with their probabilities is gathered, the decision alternatives can be
evaluated as follows:

1. Start from the extreme right-hand end of the tree and start calculating
NPV for each chance points as you proceed leftward.
2. Once the NPVs are calculated for each chance point, evaluate the
alternatives at the final stage decision points in terms of their NPV.
3. Select the alternative which has the highest NPV and cut the branch of
inferior decision alternative. Assign value to each decision point
equivalent to the NPV of the alternative selected.
4. Again, repeat the process, proceed leftward, recalculate NPV for each
chance point, select the decision alternative which has the highest NPV
value and then cut the branch of the inferior decision alternative. Assign
 the value to each point equivalent to the NPV of selected alternative and
repeat this process again and again until a final decision point is reached.

Thus, decision tree analysis helps the decision maker to take all the possible
outcomes into the consideration before reaching a final investment decision.

Advantages and disadvantages

Decision trees remain popular for reasons like these:

 How easy they are to understand

 They can be useful with or without hard data, and any data requires
minimal preparation
 New options can be added to existing trees
 Their value in picking out the best of several options
 How easily they combine with other decision making tools

However, decision trees can become excessively complex. In such cases, a

more compact influence diagram can be a good alternative. Influence diagrams
narrow the focus to critical decisions, inputs, and objectives.

Decision trees in machine learning and data mining

A decision tree can also be used to help build automated predictive models,
which have applications in machine learning, data mining, and statistics.
Known as decision tree learning, this method takes into account observations
about an item to predict that item’s value.

In these decision trees, nodes represent data rather than decisions. This type of
tree is also known as a classification tree. Each branch contains a set of
attributes, or classification rules, that are associated with a particular class label,
which is found at the end of the branch.
These rules, also known as decision rules, can be expressed in an if-then clause,
with each decision or data value forming a clause, such that, for instance, “if
conditions 1, 2 and 3 are fulfilled, then outcome x will be the result with y
certainty.”

Each additional piece of data helps the model more accurately predict which of
a finite set of values the subject in question belongs to. That information can
then be used as an input in a larger decision making model.

Sometimes the predicted variable will be a real number, such as a price.

Decision trees with continuous, infinite possible outcomes are called regression
trees.

For increased accuracy, sometimes multiple trees are used together in ensemble
methods:

 Bagging creates multiple trees by resampling the source data, then has
those trees vote to reach consensus.
 A Random Forest classifier consists of multiple trees designed to
increase the classification rate
 Boosted trees that can be used for regression and classification trees.
 The trees in a Rotation Forest are all trained by using PCA (principal
component analysis) on a random portion of the data

Advantages of Decision tree

 The cost of using the tree to predict data decreases with each additional
data point
 Works for either categorical or numerical data
 Can model problems with multiple outputs
 Uses a white box model (making results easy to explain)
  A tree’s reliability can be tested and quantified
 Tends to be accurate regardless of whether it violates the assumptions of
source data

Disadvantages of decision tree

 When dealing with categorical data with multiple levels, the information
gain is biased in favor of the attributes with the most levels.
 Calculations can become complex when dealing with uncertainty and lots
of linked outcomes.
 Conjunctions between nodes are limited to AND, whereas decision
graphs allow for nodes linked by OR.

UNIT-IV

PROJECT SCHEDULING:

Project scheduling is a mechanism to communicate what tasks need to get done

and which organizational resources will be allocated to complete those tasks in
what timeframe. A project schedule is a document collecting all the work
needed to deliver the project on time.

But when it comes to creating a project schedule, well, that’s something few
have deep experience with.

What and who is being scheduled, and for what purposes, and where is this
scheduling taking place, anyway?

A project is made up of many tasks, and each task is given a start and end (or
due date), so it can be completed on time. Likewise, people have different
schedules, and their availability and vacation or leave dates need to be
documented in order to successfully plan those tasks.
Whereas people in the past might have printed calendars on a shared wall in the
water-cooler room, or shared spreadsheets via email, today most teams
use online project scheduling tools. Typically, project scheduling is just one
feature within a larger project management software solution, and there are
many different places in the software where scheduling takes place.

For example, most tools have task lists, which enable the manager to schedule
multiple tasks, their due dates, sometimes the planned effort against that task,
and then assign that task to a person. The software might also have resource
scheduling, basically the ability to schedule the team’s availability, but also the
availability of non-human resources like machines or buildings or meeting
rooms.

Because projects have so many moving parts, and are frequently changing,
project scheduling software automatically updates tasks that are dependent on
one another, when one scheduled task is not completed on time. It also
generates automated email alerts, so team members know when their scheduled
tasks are due or overdue, and to let the manager know when someone’s
availability has changed.

Project scheduling is simple when managed online, thankfully, especially since

the software does all the hard part for you!

HOW TO SCHEDUE A PROJECT:

Before going deeper into project scheduling, let’s review the fundamentals to

project scheduling. Project scheduling occurs during the planning phase of the
project. You have to ask yourself three questions to start:
1. What needs to be done?
2. When will it be done?
3. Who will do it?

Once you’ve got answers to these questions, then you can begin to plan dates,
link activities, set the duration, milestones and resources. The following are the
steps needed to schedule a project:

1. Define Activities

What are the activities that you have to do in the project? By using a Work
Breakdown Structure (WBS) and a deliverables diagram, you can begin to take
these activities and organize them by mapping out the tasks necessary to
complete them in an order than makes sense.

2. Do Estimates

Now that you have the activities defined and broken down into tasks, you next
have to determine the time and effort it will take to complete them. This is an
essential piece of the equation in order to calculate the correct schedule.

3. Determine Dependencies

Tasks are not an island, and often one cannot be started until the other is
completed. That’s called a task dependency, and your schedule is going to have
to reflect these linked tasks. One way to do this is by putting a bit of slack in
your schedule to accommodate these related tasks.

4. Assign Resources
The last step to finalizing your planned schedule is to decide on what resources
you are going to need to get those tasks done on time. You’re going to have to
assemble a team, and their time will need to be scheduled just like the tasks.

PROCESS OR STEPS IN PROJECT SCHEDULING:

These six processes are performed in chronological order and represent the 6-
step process in developing a project schedule.

Step 1: Define the Schedule Activities

Take your Work Breakdown Structure (WBS) work packages and decompose
them further into schedule activities.

Take each WBS work package, and decide what activities are required to create
that package. For example, if your work package is "configure new computer
hardware," your schedule activities might include "set up network
configuration," "install the video card," "install applications," and then "set up
mail client."

Step 2: Sequence the Activities

Remember back in grade school where you were given a bunch of pictures and
you had to figure out their order. You had to decide which picture represented
the 1st activity, the 2nd activity and so on? Well, that is exactly what the
second step is all about. In the second step we sequence the schedule activities
by simply placing them in the order in which they need to happen. For example,
perhaps we need to install the video card first, then set up the network
configuration, install applications and then finally set up the mail client. In
some cases two or more activities can be done simultaneously. Perhaps we can
set up the mail client while other applications are being installed. This step is
where we look at the different types of schedule dependencies such as finish-to-
start, start-to-start, finish-to-finish, and start-to-finish to figure out how each of
these activities relate to each other.

Step 3: Estimate the Resources Needed for the Activity

The third step involves estimating what resources will be required to

accomplish each activity. This includes estimating needed team resources,
financial resources, and equipment. These resource needs should be selected for
each activity prior to estimating the duration of each activity which is the next
step.

Step 4: Estimating the Duration of Each of the Activities

This step requires you and your team to analyse how long it will take to
accomplish each of the activities. These estimates can be quantified through the
following tools:

 Expert Judgement: by conferring with someone who is familiar or

experienced in what it takes to accomplish a particular activity.

 Analogous Estimating: a top-down estimation approach is taken by

looking at similar projects within your organisation for estimates on how
long a particular activity should take.

 Parametric Estimating: basically this is scaling an estimate. For

example, perhaps you know it takes on average 10 minutes to install a
software application. If the "install applications" activity includes the
installation of 6 applications, you can use parametric estimation to
estimate that it will take approximately 6 times 10 minutes, or 60 minutes
to install all the applications.
  Three point estimation: sometimes referred to as PERT analysis, is a
great tool for estimating activity durations. You basically take a weighted
average of a pessimistic, expected, and optimistic estimate for the
activity duration. This estimate is in the form of (Pessimistic + 4x
(Expected) + Optimistic) / 6

Step 5: Schedule Development

This step is the process where the sequence of activities, resources needed for
the activities, and the duration of each activity is used to optimise the overall
project schedule. Tools used in this process include critical path method,
schedule compression, what-if scenario analysis, resource levelling, and critical
chain methods. Each of these topics could have one or more articles dedicated
to it, so we will not go into the detail of each.

Once the schedule is developed, it should be baselined to provide a snapshot of

the original schedule plan of the plan.

Step 6: Monitoring and Controlling the Schedule

The final step is monitoring and controlling the schedule. This step is
performed throughout the life of the project and ensures that the work results
lines up with the schedule plan. Schedule control requires the use of progress
reporting, schedule change control systems, such as the use of project change
requests, performance management, and variance analysis to determine if
additional action is required to get the schedule back in line with the plan.

ADVANTAGES OR BENEFITS OF PROJECT SCHEDULING:

1. Tight Deadlines Keep You on Track

Scheduling a deadline for a project helps the participants stay on track. Whether
time is limited or more than adequate, knowing when the project needs to be
completed will motivate those who have to complete it. With this focused
effort, the project can even come in ahead of schedule, making the entire team
look good.

2. Scheduling in Segments Makes a Large Project More

Manageable

When a large project has to be finished on deadline, it can seem insurmountable

to the team. When you break the project into segments, it gives the team
smaller goals to focus on along the way. They don't have to focus on the final
product, they simply have to focus on the first segment. When that is finished,
they can move on to the next one. This way, the team feels like they are
consistently accomplishing something as opposed to slowly moving toward the
end.

3. Forces detailed thinking and planning

This is the biggest benefit!  Brainstorming with the team on what needs to be
done when and by whom can be a very enlightening exercise.  A few months
ago I was assisting a project manager and his team as they were developing
their plan.  As we were loading the tasks into a Microsoft Project schedule
(again, could have easily been a napkin), I kept asking about predecessors and
successors.  This would be followed by a long pause as the team members
pondered the concept, then discussion and sometimes, additional tasks would
surface.  About 3/4 of the way through the exercise the project manager stated
"So now I see why we should do it this way!"

4. Improves communication
A completed / current version of the schedule keeps all team members "singing
from the same page of the hymn book".  When the team knows what is
supposed to occur when and by whom, this makes managing the rest of the
project a little easier.  Communicating with management, the customer, and
other stakeholders is also much easier with a schedule.

5. Provides a goal
Whether it is the short term goals of tasks for the week, the mid range goals of a
deliverable or milestone, or the overall project finish date, this information is all
contained within the schedule.  And providing you are following the tip of
communicating, all team members should be aware of these goals.

6. Lets you know when you are off track

Just like when you take a trip; the schedule is the roadmap that tells you how to
get from point A to point Z.  There even may be times when you experience
potholes or detours, but if you did not have a roadmap, how would you get back
on track?  Monitoring the baseline or original schedule allows you to know
when you get off track.  It will tell you just how far off track your project is,
and can allow you to experiment with what-if scenario's for getting back on
track.

7. Reduces delivery time

There are a couple of ways a schedule helps here.
Once your original schedule is complete, you now have the abilitiy to step back
and determine what tasks could be started early or completed in parallel with
other tasks (Fast Tracking). 
Secondly, by tying dates and durations to tasks creates a sense of urgency that
might not otherwise be there.  Without these dates, a team member may
postpone working on an activity that could cause a delay in downstream
milestones. 

8. Reduces costs
You may think that developing and managing a schedule would increase costs. 
It is more work right?  Here are a few examples of how a schedule reduces
cost.  
Reduces rework - Imagine someone starting to develop the code for a new
application without understanding the requirements.
Eliminates duplicate work - Imagine person A and person B heading off to
perform the same task when only person A was assigned.
Return resources sooner - Whether renting a bulldozer, or contracting a team of
people, the longer those resources are on the project, the more costly it
becomes.  A schedule will enable the project manaer to return those resources
as soon as possible.

9. Increases productivity
By examining the sequence of tasks and the resources assigned, perhaps periods
can be found where resources are under-utilized.  Assigning them to additional
tasks or changing the logic of when the tasks should be performed will make
the team more productive.

10. See problems early

Whether it is an issue with a milestone date slipping or resources being over-
allocated a month from now, having an up-to-date schedule can help you see
these problems before they become true issues impacting your project.  You
can leverage the schedule for what-if scenarios to find a solution or raise the
issue to the proper stakeholders well in advance. 
11. Enables project manager to control the project instead of the project
having control of them
This one is probably debatable by many project managers who currently have a
detailed schedule but still find themselves struggling each day just to stay
afloat.  But imagine where you would be without that plan!
DISADVANTAGES OF PROJECT SCHEDULING:

1. Tight Deadlines Add Pressure:

While a deadline can add focus, it can also add pressure. If the deadline is too
tight, or if unforeseen issues arise, it can put added stress on the team. When the
team works under stress, the potential for error increases. The team will likely
be rushing to meet the deadline. If this happens team members may miss vital
details or, worse, cut corners to finish on time.

2. Tight Deadlines Can Lead to Conflict:

When the team is under the pressure of a tight deadline, the stress level is
elevated. When the stress level is elevated, conflicts can occur. A team that has
member fighting among themselves will be ineffective. The end product will
suffer, the individual team members look bad, and you, as the scheduler, will
look equally as bad.

3. The Schedule is Out of Date

In any kind of project, schedule is a dynamically changing template that reflects

the time-related data to date. This document should be updated immediately
after relating docs were modified and new items were added. In case it is out of
date this template loses its real value and turns rather into a simple task list with
overdue events and irrelevant milestones.

4. Too Many or Few Tasks are Captured

A traditional schedule serves as a timeline model of what activities and tasks
are expected for happening throughout the project and when. Milestones are
used to track work progress, forecast team performance, and view results
obtained to date. In case there too many tasks and milestones are captured, the
schedule turns into an overloaded document that is hard to read and
comprehend. On the other hand, when it is insufficient and poorly maintained,
no adequate progress tracking can be done – an attempt to define every activity
and measure performance will be failed or at least bring no positive result
required for efficient decision making.

5. “Real-world” Situations are not Captured by Scheduling Constraints

By definition, the method of constraint-based project scheduling aims to get

tasks to start and end on specific dates that are imposed during the planning
process. The benefit here is that this method lets plan out the expected time
frames and durations for work items. Nevertheless, the problem is that schedule
constraints (all 3 types) make it very difficult for the planner to accurately map
out the correct critical path. The method promotes use of artificial milestones
and fixed dates that do not capture “real-world” situation and thus there is a
higher probability that a growing risk will be hidden and not managed
efficiently. Besides, too many constraints make use of slack inefficient.

CRITICAL PATH METHD(CPM):

The critical path method (CPM) is a step-by-step methodology, technique or

algorithm for planning projects with numerous activities that involve complex,
interdependent interactions. CPM is an important tool for project management
because it identifies critical and non-critical tasks to prevent conflicts and
bottlenecks. CPM is often applied to the analysis of a project network logic
diagram to produce maximum practical efficiency.
Critical path is the sequential activities from start to the end of a project.
Although many projects have only one critical path, some projects may have
more than one critical paths depending on the flow logic used in the project.

If there is a delay in any of the activities under the critical path, there will be a
delay of the project deliverables.

Most of the times, if such delay is occurred, project acceleration or re-

sequencing is done in order to achieve the deadlines.

Critical path method is based on mathematical calculations and it is used for

scheduling project activities. This method was first introduced in 1950s as a
joint venture between Remington Rand Corporation and DuPont Corporation.

The initial critical path method was used for managing plant maintenance
projects. Although the original method was developed for construction work,
this method can be used for any project where there are interdependent
activities.

Key Steps in Critical Path Method:

Let's have a look at how critical path method is used in practice. The process
of using critical path method in project planning phase has six steps.

Step 1: Activity specification

You can use the Work Breakdown Structure (WBS) to identify the activities
involved in the project. This is the main input for the critical path method.

In activity specification, only the higher-level activities are selected for critical
path method.

When detailed activities are used, the critical path method may become too
complex to manage and maintain.

Step 2: Activity sequence establishment

In this step, the correct activity sequence is established. For that, you need to
ask three questions for each task of your list.

 Which tasks should take place before this task happens.

 Which tasks should be completed at the same time as this task.
 Which tasks should happen immediately after this task.

Step 3: Network diagram

Once the activity sequence is correctly identified, the network diagram can be
drawn (refer to the sample diagram above).

Although the early diagrams were drawn on paper, there are a number of
computer softwares, such as Primavera, for this purpose nowadays.

Step 4: Estimates for each activity

This could be a direct input from the WBS based estimation sheet. Most of the
companies use 3-point estimation method or COCOMO based (function points
based) estimation methods for tasks estimation.

You can use such estimation information for this step of the process.

Step 5: Identification of the critical path

For this, you need to determine four parameters of each activity of the
network.

 Earliest start time (ES) - The earliest time an activity can start once the
previous dependent activities are over.
 Earliest finish time (EF) - ES + activity duration.
 Latest finish time (LF) - The latest time an activity can finish without
delaying the project.
 Latest start time (LS) - LF - activity duration.

The float time for an activity is the time between the earliest (ES) and the
latest (LS) start time or between the earliest (EF) and latest (LF) finish times.
During the float time, an activity can be delayed without delaying the project
finish date.

The critical path is the longest path of the network diagram. The activities in
the critical path have an effect on the deadline of the project. If an activity of
this path is delayed, the project will be delayed.

In case if the project management needs to accelerate the project, the times for
critical path activities should be reduced.

Step 6: Critical path diagram to show project progresses

Critical path diagram is a live artefact. Therefore, this diagram should be
updated with actual values once the task is completed.

This gives more realistic figure for the deadline and the project management
can know whether they are on track regarding the deliverables.

ADVANTAGES OF CRITICAL PATH METHOD:

 Offers a visual representation of the project activities.

 Presents the time to complete the tasks and the overall project.
 Tracking of critical activities.
 It helps in ascertaining the time schedule of activities having sequential
relationship.
 It makes control easier for the management.
 It identifies the most critical elements in the project. Thus, the
management is kept alert and prepared to pay due attention to the critical
activities of the project.
 It makes better and detailed planning possible.

LIMITATIONS OF CPM:
1. CPM operates on the assumption that there is a precise known time that each
activity in the project will take. But, it may not be true in real practice.

2. CPM time estimates are not based on statistical analysis.

3. It cannot be used as a controlling device for the simple reason that any
change introduced will change the entire structure of network. In other words,
CPM cannot be used as a dynamic controlling device.

Conclusion
Critical path identification is required for any project-planning phase. This
gives the project management the correct completion date of the overall
project and the flexibility to float activities.

A critical path diagram should be constantly updated with actual information

when the project progresses in order to refine the activity length/project
duration predictions.

PROGRAM EVALUATION REVIEW TECHNIQUE(PERT):

PERT stands for Program Evaluation Review Technique. PERT charts are

tools used to plan tasks within a project – making it easier to schedule and
coordinate team members accomplishing the work.

PERT charts were created in the 1950s to help manage the creation of weapons
and defense projects for the US Navy. While PERT was being introduced in the
Navy, the private sector simultaneously gave rise to a similar method
called Critical Path.

PERT is similar to critical path in that they are both used to visualize the
timeline and the work that must be done for a project. However with PERT,
you create three different time estimates for the project: you estimate
the shortest possible amount time each task will take, the most probable
amount of time, and the longest amount of time tasks might take if things don’t
go as planned.

Program evaluation and review technique (PERT) is a technique adopted by

organizations to analyze and represent the activity in a project, and to illustrate
the flow of events in a project. PERT is a method to evaluate and estimate the
time required to complete a task within deadlines.

PERT serves as an management tool to analyze, define and integrate events.

PERT also illustrates the activities and interdependencies in a project. The main
goal of PERT is to reduce the cost and time needed to complete a project.

Program (Project) Evaluation and Review Technique (PERT) is a project

management tool used to schedule, organize, and coordinate tasks within a
project. It is basically a method to analyze the tasks involved in completing a
given project, especially the time needed to complete each task, and to identify
the minimum time needed to complete the total project.

STEPS IS PERT:

1. Identify the specific activities and milestones.

The activities are the tasks required to complete a project. The milestones are
the events marking the beginning and the end of one or more activities. It is
helpful to list the tasks in a table that in later steps can be expanded to include
information on sequence and duration.

2. Determine the proper sequence of the activities.

 This step may be combined with the activity identification step since the
activity sequence is evident for some tasks. Other tasks may require more
analysis to determine the exact order in which they must be performed.

3. Construct a network diagram.

Using the activity sequence information, a network diagram can be drawn

showing the sequence of the serial and parallel activities. Each activity
represents a node in the network, and the arrows represent the relation between
activities. Software packages simplify this step by automatically converting
tabular activity information into a network diagram.

4. Estimate the time required for each activity.

Weeks are a commonly used unit of time for activity completion, but any
consistent unit of time can be used. A distinguishing feature of PERT is its
ability to deal with uncertainty in activity completion time. For each activity,
the model usually includes three time estimates:

Optimistic time – generally the shortest time in which the activity can be
completed. It is common practice to specify optimistic time to be three
standards deviations from the mean so that there is a approximately a 1%
chance that the activity will be completed within the optimistic time.

Most likely time – the completion time having the highest probability. Note
that this time is different from the expected time.

Pessimistic time – the longest time that an activity might require. Three
standard deviations from the mean is commonly used for the pessimistic time.

PERT assumes a beta probability distribution for the time estimates. For a beta
distribution, the expected time for each activity can be approximated using the
following weighted average:

Expected time = ( Optimistic + 4 x Most likely + Pessimistic ) / 6

Variance of the activity is given by : [ ( Pessimistic - Optimistic ) / 6 ]2

5. Determine the critical path.

The critical path is determined by adding the times for the activities in each
sequence and determining the longest path in the project. The critical path
determines the total calendar time required for the project. If activities outside
the critical path speed up or slow down (within limits), the total project time
does not change. The amount of time that a non – critical path activity can be
delayed without the project is referred to as a slack time. If the critical path is
not immediately obvious, it may be helpful to determine the following four
quantities foe each activity:

ES – Earliest Start time

EF - Earliest Finish time

LS – Latest Start time

LF - Latest Finish time.

These times are calculated using the expected time for the relevant activities.
The earliest start and finish times of each activity are determined by working
forward through the network and determining the earliest time at which an
activity can start and finish considering its predecessors activities. The latest
start and finish times are the latest times that an activity can start and finish
without delaying the project. LS and LF are found by working backward
through the network. The difference in the latest and earliest finish of each
activity is that activity’s slack. The critical path then is the path through the
network in which none of the activities have slack.

The variance in the project completion time can be calculated by summing the
variances in the completion times of the activities in the critical path. Given this
variance, one can calculate the probability that the project will be completed by
the due date assuming a normal probability distribution for the critical path.
The normal distribution assumption holds if the number of activities in the path
is large enough for the central limit theorem to be applied.

Since the critical path determines the completion date of the project, the project
can be accelerated by adding the resources required to decrease the time for the
activities in the critical path. Such a shortening of the project sometimes is
referred to as project crashing.

ADVANTAGES OF PERT:
Visibility of Critical Path: The PERT method will show the critical path in a
well-defined manner. The critical path is the path with activities that cannot be
delayed under any circumstances. A proper knowledge about the stack values
with limited conditions of dependencies will help the project manager to bring
fast and quality decisions that will favor the project performance.

Analysis of Activity: The activity and the events are analyzed from the PERT
networks. These are analyzed independently as well as in combination. This
will give a picture about the likely completion of the project and the budget.

Coordination: The various departments of the construction organization will

deliver data for the PERT activities. A good integration is developed between
all the departments which will help in improving the planning and the decision-
making capabilities of the project team. The combination of qualitative and
quantitative values from a large amount of data will help in improving the
coordination of the project activities. This will also improve the communication
between various departments of the organization.

What - if -Analysis: The possibilities and the various level of uncertainties can

be studied from the project activities by properly analyzing the critical path.
This type of analysis is called as what-if-analysis. For this various sets of
permutation and combination is conducted. Among them, the most suitable
combination is taken into consideration. This set chosen will be the one with
minimum cost, economy and best result. This analysis helps to identify the risk
associated with any activities.

Large Project Planning:A PERT chart makes planning large projects easier,
according to the University of Pittsburgh School of Information Sciences. It
answers three key questions about each activity that help managers identify
relationships between tasks and task dependencies. These questions involve
how long it will take to complete an activity, and which other activities must
occur immediately before and immediately after this activity for effective
project completion. PERT is a good way of making these relationships visible
in a diagram.
DISADVANTAGES OF PERT:
Complicated Charts:PERT charts can be complicated and confusing, with
hundreds or even thousands of tasks and dependency relationships, as noted by
the University of Pittsburgh. This is especially true of very large projects.
PERT diagrams can be expensive to develop, update and maintain.

Prediction Inaccuracies: PERT charts depend on the ability to predict precise

time frames for multitudes of tasks. Complicated projects involving many
activities and suppliers can make this prediction difficult, as explained by U.S.
Legal Definitions. Unexpected events occur, and sometimes the original
estimate of time needed for specific steps was inaccurate. PERT works best in
projects where previous experience can be relied on to accurately make these
predictions.
Time Focused Method: The method of PERT is a time oriented method,
where the time required to complete the respective activity is of higher
importance. Hence the time determination of each activity and its allocation is
very much necessary. This is done based on an assumption and within this time
the work will be completed. If this is not the case issues will arise.

Subjective Analysis: The activities for a project is identified based on the data

available. This is difficult in case of PERT as these are mostly applied for a
project that is newly conducted or those without repetitive nature. The project
dealt by PERT will be a fresh project data that make the collection of
information to be subjective in nature. This will bring less accuracy on the time
and the estimated time.

There are chances to have inaccuracy and bias in the sources of data. This
makes it unreliable. As this is not repetitive in nature, there is no sense in
bringing the records from the past historical data.

Prediction Inaccuracy: As there is not past records or assistance to bring an

outline for the project, predictions take their role. The overall project may move
to total loss if the predictions and the decisions are inaccurate. No trial and
error method can be employed.
Expensive: As this method is carried out based on predictions in overall, they
find too expensive in terms of methods employed, the time consumed and the
resources used.

Other Issues: This method is highly labor intensive in nature. As there are

chances of increase in project activities large and complicated networks are
developed as many task dependencies come into existence. If two activities
share common resources, this technique won;t find very apt for the project. 

Cost consideration in PERT/CPM

Project cost: in order to include the cost aspects in project scheduling we must
first define the cost duration relationships for various activities in the project.
The total cost of any project comprises direct and indirect costs.

Direct cost: this cost is directly depends upon the amount of resources in the
execution of individual activities manpower loading materials consumed etc.
the direct cost increase if the activity duration is to be reduced.

Indirect cost: This cost is associated with overhead expenses such as

managerial services, indirect supplies, general administration etc. the indirect
cost is computed on a paper day, per week, or per month basis. The indirect
cost decreases if the activity duration is to be reduces.

DIFFERENCE BETWEEN PERT AND CPM:

BASIS FOR
PERT CPM
COMPARISON

1. Meaning PERT is a project CPM is a statistical technique

management technique, of project management that
used to manage uncertain manages well defined
activities of a project. activities of a project.

2. What is it? A technique of planning A method to control cost and

and control of time. time.

3. Orientation Event-oriented Activity-oriented

BASIS FOR
PERT CPM
COMPARISON

4. Evolution Evolved as Research & Evolved as Construction

Development project project

5. Model Probabilistic Model Deterministic Model

6. Focuses on Time Time-cost trade-off

7. Estimates Three time estimates One time estimate

8. Appropriate for High precision time Reasonable time estimate

estimate

9. Management of Unpredictable Activities Predictable activities

10.Nature of jobs Non-repetitive nature Repetitive nature

11.Critical and No differentiation Differentiated

Non-critical
activities

12.Suitable for Research and Development Non-research projects like

Project civil construction, ship
building etc.

13.Crashing Not Applicable Applicable

concept

FLOAT TIMES:
Float time refers to the amount of time between when an individual writes and
submits a check as a payment and when the individual's bank receives the
instruction to move funds from the account.

 There are 2 types of floats which can exist i.e.

1. Total Float
2. Free Float
1. Total Float is the amount of time that a schedule activity can be delayed or
extended from its start date (early) without delaying the project finish date.

What is the formula for Total Float?

Total Float = LF - EF (or LS - ES)

where ES = Early Start, EF = Early Finish, LS = Late Start, and LF = Late

Finish

2. Free Float is the amount of time that a schedule activity can be delayed
without delaying the start date (early) of any following activity.

What is the formula for Free Float?

Free Float = ES of next activity - EF

CRASHING OF ACTIVITIES: 

Crashing is the technique to use when fast tracking has not saved enough time
on the schedule. It is a technique in which resources are added to
the project for the least cost possible. Cost and schedule tradeoffs are analyzed
to determine how to obtain the greatest amount of compression for the least
incremental cost.

Crashing a project is an advanced project management technique which means

to add the appropriate amount of skilled project resources to critical path
task(s), which is commonly used to compress the project schedule. The project
schedule compression technique consists of:

1. Fast tracking
2. Crashing a project

In this lesson we will focus on crashing a project.

Crashing your project will directly impact two out of three of your project triple
constraints, which are schedule and cost. Crashing your project will accelerate
your project delivery schedule and increase your project budget; however, it
will have no effect to your project scope. Typically, when project sponsors
want you to crash your project, it means they are not concerned about the
project costs. Either they have unrestricted budgets or they just want you to get
the project done as fast as possible.

Consequently, since crashing your project will increase your project cost, you
must identify all critical path tasks that have the potential to compress your
project schedule. If you are unable to add resources to critical path tasks
resulting in shortening your project schedule, do not attempt to implement
project crashing. Do not select non-critical path tasks to crash because adding
additional resources to non-critical path tasks will have no effect to your project
schedule.

MULTIPLE PROJECTS:
Managing Multiple Projects. Handling several projects at once means more
than dealing with just multiple schedules; it involves multiple risks, multiple
stakeholders, and multiple functional managers who allocate resources.

Planning and monitoring of several projects

Multi project management plans, manages and monitors multiple projects that
are independent from each other. The multi project management is also defined
as a management approach due to the appropriate organizational structure,
methods, processes and incentive systems. Such measures as matrix
organization, center organization or creation of the central coordination offices
often defined as project management office are the organizational measures. At
the same time the multi project management provides the coordination and
establishment of the incentive and premium systems for the employees that
supports the project development.

Project portfolios will be observed in the multi project management. Operative

and strategic decisions will be made. On the one hand the project portfolio must
be prepared strategically correct and the correct priorities must be set. On the
other hand the individual projects must be carried out in a commercial
economic way at an operational level; resource conflicts as well as bottlenecks
should be solved.

THREE METHODS OF MANAGING MUTIPLE PROJECTS:

I. Organizing efficiently:

1. Prioritize your projects to keep things in perspective. Not everything you

work on has the same payoff for finishing it or consequences for not finishing
it. As you work on projects and constantly add more to your list, use some kind
of system to remind yourself what is the most important and what you can put
off for long amounts of time.
 One way to prioritize is to take note of when things are due and make
sure you mostly work on the things that are due the soonest. You will still need
to work on longer term projects over time, rather than waiting until the deadline
is upon you.
 You can also prioritize based on the size of the project, or the difficulty
of getting it done. It can be helpful to set a higher priority on difficult projects
so you avoid putting them off and hurrying them at the last minute.
 Develop a color coding system that gives you an at-a-glance visual of
relative priority levels. For example, however you decide to assign priorities,
make red the highest, purple the middle, and blue the level you can hold off on.
2. Write out a detailed process for each project. Every project will entail
multiple phases, steps, or aspects. Make a habit of breaking projects down into
specific chunks of work. Write these out and make a plan for how you will
work through each step of the process. Assign a time limit for each task and
stick to that, but overestimate how long it will take so you have some cushion.

 This is the kind of habit that may seem like it is just using extra time, but
if you have a detailed guide to what needs to be done before you start, it helps
guard against forgetting something along the way.
 Don’t be afraid to go overboard on the details because the more you
expand things out, the clearer it will be what you need to get done. Plus you
will feel like you are accomplishing more as you work through each small part
of the project.
3. Keep important information in a single, designated place. Storing vital
information on your various projects in one location helps ensure you never
lose track of it. This could mean one notebook or spreadsheet, or one specific
folder for all project documents. This single place could have sections for basic
info on all the projects and specific info on each individual project.
 If it doesn’t make sense to store information from separate projects in a
central place, at least be sure to store all of the information for each single
project in one place.
 When you are working with a team who all need access to the set of
documents, make sure they have any passwords necessary or copies of any
physical documents.
 Once a project is finished, consider trashing its documents (if it makes
sense to do so) or relocating all of the project’s information. Maybe you would
never throw away or delete work you’ve done, but you can at least store it in a
separate place designated specifically for finished items.
II. Maintaining productivity:
1. Pick something you dread and get to work on it first thing in the
morning.Avoiding things you dread doing never makes it easier to do them.
Force yourself to tackle the hard stuff early in the day while you are somewhat
fresh. You’ll rarely stop dreading something if you put it off longer. Once the
dreaded task is completed, you’ll feel a burden lifted and it will spur you on for
the rest of the day.

 Dreaded tasks may not always be things that are prioritized highest, but
it’s an exception to the priority rule.
 If you are dreading something that also happens to be a time-consuming
task, weigh this in mind. Maybe you can tackle a significant chunk of the
process in the morning one day and finish it in the morning the next day.
2. Make course corrections when you hit a wall. You’ll have times when you
are working on something important, but you just hit a wall and stop making
progress. Staring at the wall and beating yourself up are not helpful, so make a
smooth transition on to other work. You may need to come back quickly, but
taking a break will help keep you productive.
 Switching off to another task may not always be an option, especially if
you are under a tight time crunch. Consider your situation and act accordingly.
Maybe you don’t have time to switch completely to a different project, but you
can take a five minute breather and refocus.
 If you have the time to switch off to a different project, give that one
your full attention. It’s no use changing projects if your mind is stuck on the
first one.
3. Eliminate unnecessary aspects of the work. You may have habits while
working on projects, but you realize those things are not directly contributing to
the work at hand. Don’t make extra work for yourself. Evaluate your processes
and look for things that you can stop doing. This will free up time for important
things and will streamline your efforts.

 For example, maybe you always make a themed bulletin board for new
projects, which is really only a tactic to put off getting started. Or maybe you
come up with funny code names for team members, but you never actually use
them during the project.
 You don’t want to start cutting things out that are worthwhile practices, but
try to be honest about what things contribute and what things don’t.
III. Working With Others:
1. Set limits and say no. You have a threshold for how much you can
realistically manage. It’s important to know that limit and to stay in the sweet
spot. If you are at maximum capacity and another opportunity presents itself,
learn to say no. It may be better to miss out on something and actually get done
what you already have than taking on another project and failing them all.

 Learning where exactly your limit is may take some trial and error. If you
don’t get it right the first time, don’t give up on yourself. You have to find your
limit somehow, even if it means dropping the ball once or twice.
 Maybe the newly offered project is not something you can afford to pass
up. Carefully consider when this is the case. You may burn a bridge by letting
go of something you already committed to working on.
2. Assign tasks and don’t micromanage. When you have a team you work
with or oversee, it is always best to delegate as much of the work as you can.
You may tend to want to be in control, but you have people helping for a
reason. Give people assignments at the outset of a project and let them do what
they are assigned. Don’t take back control partway through.[8]

 When you have good workers, a group of people can get more done than
you can all alone. If you tend to do all of the work but delegating is an option,
consider passing off some of the work. If you have workers available to you,
don’t let their help go to waste.
 If you are in charge, it’s still your responsibility to make sure everything
is getting done. Set some times that you will check in on progress and then
leave your team alone except during those specific times.

3. Learn your team members’ communication styles and work with

them. You may be in charge of people who work very differently than you. To
be effective, you need to accept that. Knowing how each member of your team
communicates best will help you get more done. Without going overboard,
cater a little to each person so you can get the best work possible out of them.
 This could apply specifically to forms of communication like phone and
email. Some team members may prefer a call when you are giving them
feedback. Others will value the efficiency of email.
 It also applies to who likes to joke, who prefers to be serious, and how
you need to frame feedback. You want to get along with your team as much as
possible so they want to work with you.
 Keep notes on your people so you can be sure to apply what you learn
about them. You may ask them directly about some of their preferences or you
may do better to figure it out over time.
4. Stay in communication regarding progress. Whether you are in charge or
you report to someone else, progress updates are important. Set times with
people you are in charge of for them to update you. Be proactive about
reporting to your supervisor as you get things done. Consistent, if not constant,
updates will keep a project moving smoothly.
 It can be helpful to have established progress report deadlines at various
stages of a project. This could be daily for short projects, or once a week for
projects that are ongoing.
 This is especially important if one part of a project builds on the part
before it. If Tom is waiting for Leslie to finish her part before he can work on
his, he needs to know how far along she is.
 Setting expectations in the beginning for how progress updates will be
handled is important. You don’t want to get halfway through a project and
surprise people with a progress check.

CONSTRAINTS IN SELECTION OF PROJECT:

A constraint, in project management, is any restriction that defines a project's

limitations; the scope, for example, is the limit of what the project is expected
to accomplish. 

The three most significant project constraints -- schedule, cost and scope -- are
sometimes known as the triple constraint or the project management triangle. A
project’s scope involves the specific goals, deliverables and tasks that define
the boundaries of the project. The schedule (sometimes stated more broadly
as time) specifies the timeline according to which those components will be
delivered, including the final deadline for completion. Cost (sometimes stated
more broadly as resources) involves the financial limitation of resources input
to the project and also the overall limit for the total amount that can be spent.

Project Management Constraints

Time: What’s the deadline for delivering the output?

Scope: What exactly is the expected outcome?
Cost: How much money is available to achieve this outcome?

It’s called the triple constraint for a reason. If you’re pulling one constraint
lever, it will directly affect the other two constraints. For example, if you decide
to extend the scope and build 20 webpages instead of 10, you’ll need more time
and money to achieve that adjusted goal.

The triple constraint is well-known, so it’s already been discussed a lot. But
even if this type of constraint is balanced, issues can occur. So I started
wondering why.

Most project management books will tell you this: If you make sure that the
triple constraint is covered, you won’t have any problems. But you actually
need to optimize further constraints as well.

CONSTRAINTS IN PROJECT:

A project is often defined as successful if the project’s objectives are achieved

by the deadline and stay within the budget. But apart from time, scope, and
cost, there are six additional constraints that limit the process of properly
accomplishing the project’s goals.
  Schedule

The schedule constraint is the time available to deliver a project. In this case,

your schedule is that you must return from the store before your colleague
returns to their own station.

If the allotted time is overrun (due to traffic, queues at the store, etc.),
additional costs will be incurred because your colleague must be paid extra to
oversee your station for the additional time. Alternatively the quality, scope, or
customer satisfaction of the project may be impacted as your colleague may be
unable to remain for the additional time, thus forcing you to return before
purchasing the lunch item.

 Customer Satisfaction

If you are happy with the end result, you get a good lunch for a good price with
no delay and your work station is covered, there's a good chance the customer
(you!) will be satisfied.

The satisfaction of the customer is jeopardized when any other project

constraint is impacted. For example, you will be dissatisfied if you have to pay
more for your lunch than planned or if you are unable to purchase lunch.

Customer satisfaction measures how much you’re meeting the customer’s

expectations. If your team handed over excellent deliverables on time and
within the budget, your client will probably be happy.

But, if your cost turned out to be higher than expected, it would force you to
make a tradeoff. Perhaps you’re sacrificing customer satisfaction, since the
product isn’t meeting your client’s expectations anymore. In the end, customer
satisfaction will highly affect the project’s success.
  Quality

Project quality measures how successful and correct the project deliverable is.
In this case, it will be considered high if the goal is achieved: i.e., that your
lunch is purchased on time without additional cost, and your work station is
maintained for the duration of your absence. A change to project quality is
likely to impact customer satisfaction.

In our example, the quality doesn’t define the number of webpages, but there
could be a quality tolerance regarding the number of words. Perhaps you’ve
requested 1,000 words, and you have a quality tolerance of +/- 100 words. So if
a webpage contains 900 words, you’d approve it. And if another webpage only
contains 850 words, you’d reject it.

Quality interrelates with the other constraints. Let’s assume you’re running out
of time and need to meet a certain due date. You could possibly meet the
deadline by enlarging the quality tolerance and decreasing the number of words
to 800.

 Scope

Scope refers to the features of the project (what the project does and how it
does it). This includes the lunch being purchased, driving to a specific local
store, and your colleague covering your station. Examples of out of scope
features are: cycling to the store, having 2 colleagues take over your station, or
buying dinner instead of lunch.

 
 Risk

Managing risks is an important task for project managers. But what does this
term actually mean? When you estimate probability, a risk will have a certain
impact on your project. Perhaps you’re creating a wireframe for your website,
and you decide to skip the client-review step because you’re running late. If so,
there’s a risk that the client will reject your final webpages.

Of course, you can control risk to a certain extent. For instance, you could
decide to avoid the risk and insist on the review step. But this decision would
affect your timeline and your related costs, since the client would review each
of your designs, and a project manager needs to oversee this process.

 Resources

Resources are strongly connected to the project cost. The amount of money
that’s available for achieving the desired outcome will restrict the use and
acquisition of resources, which creates a separate constraint.

Sometimes, even an infinite amount of money couldn’t allow you to acquire the
specific resources you need. For example, it’s going to take longer than you
expected to receive a physical resource in the project (such as a chip), which
will cause you to miss the deadline. If this resource is essential to the project,
you’ll have to sacrifice making the deadline, because no reasonable amount of
money could reduce the delivery time.

 Sustainability

The sustainability of a project can play a major role in the long-term strategy of
a company, and can often affect a project’s success. There are three parts of
sustainability: social, environmental, and economic. Even if the first two ones
don’t apply to your project, the economic component shouldn’t be neglected by
project managers.
Basically, managing a project’s economic sustainability refers to the way you
handle its possible impact on the future of the the organization behind it. For
example, if you’re managing an automotive production line, you could use
cheap resources to build some parts of the cars, in order to save costs. But
you’ll also be sacrificing sustainability, since cheaper parts tend to bite the dust
more frequently than high-quality pieces.

 Organizational Processes & Structures

The organizational structure of a company can greatly impact the project’s

success, since it’s defining the project’s environment. Stakeholders could have
a significant influence on decisions that need to be taken. Or the slow
communication flow between executives and project managers could result in
unpredictable project decelerations.

Coping with organizational structure and limitations can be difficult. You’re

often not able to break through the organization’s existing patterns, make the
deadline, and stay within the budget.

 Methodology

Obviously, you’ve heard about Scrum, Agile, and Kanban. Different project

management methodologies can be used to approach a project.

Each of these methodologies manifest various limitations. If you use Scrum,

you’ll need to organize daily meetings and get plenty of reviews, so you’ll have
to acquire decent resources to cover these efforts. But if you use Agile, you’ll
be more likely to deliver excellent quality.
However, with Agile, it’s harder to estimate the needed time upfront, which
will increase the risk of missing your deadline. Hence, to choose the right
methodology, it’s important to assess the project’s situation.

PROJECT DEPENDENCY:

A project dependency is the logical, constraint based or preferential relationship

between two activities or tasks such that the completion or the initiation of one
is reliant on the completion or initiation of the other.

NATURE OF DEPENDENCIES IN PROJECT MANAGEMENT

1. EXTERNAL DEPENDENCIES

In the project, sometime we may have depend on the activity beyond our work.
These are generally known as prerequisites for the project, but still they are
dependencies for activities in the project.

For example, you see that generally to perform any installation, you may be
dependent on the hardware and software procurement, which may be procured
from an external party.

2. DISCRETIONARY DEPENDENCIES

These dependencies are not really the barriers. Instead these dependencies are a
matter of preference. Meaning that they are good to fulfill as a matter of
preference.

3. MANDATORY DEPENDENCIES

As the name says these dependencies are mandatory and must fulfill at any
cost. For example until you download the software, you can install the software
on the server.
4. INTERNAL DEPENDENCIES

These dependencies usually are within the project team’s control and hence the
name internal dependencies.

The 4 dependency relationships:

1. End-to-Start

The most common type of dependency, the End-to-Start relationship is saying

that the predecessor task must finish before the successor task can start. So if
we take the home building example, this means that you will need to buy land
first, before you can start building a house. 

2. Start-to-Start

Start-to-Start dependencies state that the predecessor task must start before
successor can start. The tasks don’t have to start simultaneously, the successor
task can start any time after the predecessor has started. An example would be:
The moment you start cooking the rice, you can start preparing the vegetables.
3. End-to-End

End-to-End dependencies say that the predecessor must finish before the
successor can finish. The tasks don’t have to finish at the same time, the
successor can finish any time after the predecessor has ended. For example, if
you didn’t build your house from scratch, but ordered a prefabricated house,
some tasks can only be finished after the house was “delivered” (e.g. adding the
patio). 

4. Start-to-End

This scenario almost never happens, but for the sake of completeness, should
also be mentioned here. The Start-to-End is saying that the successor task can’t
finish before the predecessor task has started. The easiest example here is
billing, you can only finish the billing process, after you have started the
delivery of your product or service. 

CAPITAL RATIONING:

Capital rationing is a common practice in most of the companies as they have

more profitable projects available for investment as compared to the capital
available. In theory, there is no place for capital rationing as companies should
invest in all the profitable projects. However, a majority of companies follow
capital rationing as a way to isolate and pick up the best projects under the
existing capital restrictions.

ASSUMPTIONS OF CAPITAL RATIONING

The primary assumption of capital rationing is that there are restrictions on
capital expenditures either by way of ‘all internal financing’ or ‘investment
budget restrictions’. Firms do not have unlimited funds available to invest in all
the projects. It also assumes that capital rationing can come out with an
optimal return on investment for the company whether by normal trial and error
process or by implementing mathematical techniques like integer, linear or goal
programming.

ADVANTAGES OF CAPITAL RATIONING

Capital rationing is a very prevalent situation in companies. There are a few
advantages of practicing capital rationing:

BUDGET
The first and important advantage is that capital rationing introduces a sense of
strict budgetingof the corporate resources of a company. Whenever there is an
injunction of capital in the form of more borrowings or stock issuance capital,
the resources are properly handled and invested in profitable projects. 
NO WASTAGE
Capital rationing prevents wastage of resources by not investing in each and
every new project available for investment.
FEWER PROJECTS
Capital rationing ensures that less number of projects are selected by imposing
capital restrictions. This helps in keeping the number of active projects to a
minimum and thus manage them well.
HIGHER RETURNS
Through capital rationing, companies invest only in projects where the
expected return is high, thus eliminating projects with lower returns on capital.
MORE STABILITY
As the company is not investing in every project, the finances are not over-
extended. This helps in having adequate finances for tough times and ensures
more stability and an increase in the stock price of the company.

DISADVANTAGES OF CAPITAL RATIONING:

Capital rationing comes with its own set of disadvantages as well. Let us
describe the problems that rationing can lead to:

EFFICIENT CAPITAL MARKETS

Under efficient capital markets theory, all the projects that add to company’s
value and increase shareholders’ wealth should be invested in. However, by
following capital rationing and investing in only certain projects, this theory is
violated.
THE COST OF CAPITAL
In addition to limits on budget, capital rationing also places selective criteria on
the cost of capital of shortlisted projects. However, in order to follow this
restriction, a firm has to be very accurate in calculating the cost of capital. Any
miscalculation could result in selecting a less profitable project.
UN-MAXIMISING VALUE
Capital rationing does not allow for maximizing the maximum value creation as
all profitable projects are not accepted and thus, the NPV is not maximized.
SMALL PROJECTS
Capital rationing may lead to the selection of small projects rather than larger-
scale investments.
INTERMEDIATE CASH FLOWS
Capital rationing does not add intermediate cash flows from a project while
evaluating the projects. It bases its decision only on the final returns from the
project. Intermediate cash flows should be considered in keeping the time value
of money in mind.
CAPITAL RATIONING WITH PROJECT INDIVISIBIITY:

Capital rationing refers to a situation where a firm is unable to undertake all

profitable projects despite having positive NPV—due to shortage of funds.

Under capital rationing, the decision maker is compelled to reject a profitable

and viable project due to fund constraints. Therefore, capital rationing involves
identification of profitable projects and choosing of a single or combination of
projects from the identified profitable projects.

Choosing of a single or a combination of profitable projects will depend on

whether the projects are divisible or indivisible.

Indivisible projects are those projects that can be accepted or rejected wholly.

The following steps should be followed for solving the problem under such
situations:
(i) Construct a list showing all feasible combinations of projects within the
funds available for investment.

(ii) Choose that combination whose aggregate NPV is maximum.

Example 10.2:
Using the data of Example 10.1 determine the optimal project mix assuming
that projects are indivisible.
PROJECT COMPLETION REPORT:

Project completion report is a formal document of closing of a project. You

must prepare the project completion report even if your supporting agency does
not put the obligation on you. It is a document of organization’s learning also.
Hence it must be prepared and preserved. For writing Project completion
report:

 Create the title page outlining the project title, its starting and ending date
and name of the supporting as well as implementation agencies.
 Add the table of contents.
 Give an overview of the project writing a summary statement that the
project is complete as the beginning of the overview. Further describe your
project in the background of the problems aimed by the project and specify
the goals and objectives of the project as well as its intervention area in the
overview.
 Describe the results and outcomes of the project.
 You may add a section as project highlights describing the most
important aspects of the project.
 Write about the issues, challenges and difficulties as risk summary.
 At the end write about the lessons learnt, what worked during the
implement and what did not; what are the ways to improve the intervention.
 You may also give some of the best practices as the appendix in the
project completion report.
Hence following the above guidelines you may prepare the project reports.
However there is always a room for your own creativity and innovative
thoughts in your project report.

UNIT-2

PROJECT FINANCE

Project finance is a method of financing very large capital intensive projects,

with long gestation period, where the lenders rely on the assets created for the
project as security and the cash flow generated by the project as source of funds
for repaying their dues.

Project finance generally covers green-field industrial projects, capacity

expansion at existing manufacturing units, construction ventures or other
infrastructure projects. The term ‘infrastructure projects’ is used here in its
general and wide meaning to describe physical structures (such as roads,
highways, ports, airports etc.) or systems (such as electricity transmission
system, pipeline distribution systems) that are designed, built, operated and
maintained to provide for certain physical facilities (such as roads, railways,
airports, urban mass rapid transit systems) or commodities (such as natural gas,
petroleum, electricity) or for the due utilization of natural resources (water,
crude oil, minerals) or provision of services (telecommunications, broadcasting,
air transport services, waste handling and treatment) through the general public
within the specified geographical area. Capital intensive business expansion
and diversification as well as replacement of equipment may also be covered
under project finance.
Project Financing Participants and Agreements Sponsor/Developer:

The sponsor(s) or developer(s) of a project financing is the party that organizes

all of the other parties and typically controls, and makes an equity investment
in, the company or other entity that owns the project. If there is more than one
sponsor, the sponsors typically will form a corporation or enter into a
partnership or other arrangement pursuant to which the sponsors will form a
"project company" to own the project and establish their respective rights and
responsibilities regarding the project.

Additional Equity Investors:

In addition to the sponsor(s), there frequently are additional equity investors in

the project company. These additional investors may include one or more of the
other project participants.

Construction Contractor:

The construction contractor enters into a contract with the project company for
the design, engineering, and construction of the project.

Operator: 

The project operator enters into a long-term agreement with the project

company for the day-to-day operation and maintenance of the project.

Feedstock Supplier:

The feedstock supplier(s) enters into a long-term agreement with the project
company for the supply of feedstock (i.e., energy, raw materials or other
resources) to the project (e.g., for a power plant, the feedstock supplier will
supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).

Product Off taker:

The product off taker(s) enters into a long-term agreement with the project
company for the purchase of all of the energy, goods or other product produced
at the project.

Lender:

The lender in a project financing is a financial institution or group of financial

institutions that provide a loan to the project company to develop and construct
the project and that take a security interest in all of the project assets.

Stages in Project Financing

1. Pre- finance stage

It includes the following

a)Project identification

A Project or Projects selected should be integrated with the  Strategic

Plan of the Organisation.  The project plan should match the goals of the
organization. It should be realistic to be implemented.

b) Identifying risk and minimizing

“The right project at the right time at the right place and at the right price”.

There should be adequate amount of resources available for the project to

be implemented.

c) Technical  and Financial feasibility

An organization before starting any new project or expanding an existing
one must look into analyzing each and every factor which is essential for
the project to be feasible. It must be financially as well as technically
feasible.

2. Financing stage

a)Arrangement of equity/debt/loan.

b)Negotiation  and Syndication of the same.

c)Documentation and checking all the rules and regulations or policies

relating to the starting of the project.

d)     Payment.

3. Post Financing

a)Monitoring and review of project from time to time. The project manager
must keep a check on the proper working of the project.

b)Project closure – It is ending the project

c)Repayment and monitoring

The amount taken in the form of loan, equity and debt must be repaid back
and proper monitoring and control of the project must be carried.
ADVANTAGES:

1. Non-Recourse: The typical project financing involves a loan to enable the

sponsor to construct a project where the loan is completely ‘non-recourse’ to
the sponsor, i.e., the sponsor has no obligation to make  payments on the project
loan if revenues generated by the project is insufficient to cover the principal
and interest payments on the loan. In order to minimize the risks associated
with a non-recourse loan, a lender typically will require indirect credit supports
in the form of guarantees, warranties and other covenants from the sponsor, its
affiliates and third parties involved with the project.

2. Maximise Leverage: In a project financing, the sponsor typically seeks to

finance the cost of development and construction of the project on a highly
leveraged basis. Frequently, such costs are financed using 80 to 100 percent
debt. High leverage in a non-recourse project financing permits a sponsor to put
less in funds at risk, permits a sponsor to finance the project without diluting its
equity investment in the project and, in certain circumstances, also may permit
reductions in the cost of capital by substituting lower-cost, tax-deductible
interest for higher-cost, taxable returns on equity.

3. Off-Balance-Sheet Treatment: Depending upon the structure of project

financing, the project sponsor may not be required to report any of the project
debt on its balance sheet because such debt is non-recourse to the sponsor. Off-
balance-sheet treatment can have the added practical benefit of helping the
sponsor comply with covenants and restrictions relating to borrowing funds
contained in other indentures and credit agreements to which the sponsor is a
party.

4. Maximize tax benefit:  Project financings should be structured to maximize

tax benefits and to assure that all possible tax benefits are used by the sponsor
or transferred, to the extent permissible, to another party through a partnership,
lease or other vehicle.
Disadvantages:

Project financings are extremely complex.

It may take much longer period of time to structure, negotiate and document a
project financing than a traditional financing, and the legal fees and related
costs associated with a project financing can be very high. Because the risks
assumed by lenders may be greater in a non-recourse project financing than in a
more traditional financing, the cost of capital may be greater than with a
traditional financing.