Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

PROJECT ANALYSIS & EVALUATION

CHAPTER- 4 = Project Analysis (Part Two)

TECHNICAL ANALYSIS

Engineering and technology play a very vital role in the overall project environment. It is the task of
engineering to design the functional and physical layout for the industrial plan and to provide the
necessary ancillary infrastructure. An integral part of engineering is the selection of an appropriate
technology. The required machinery and equipment must be determined in relation to the
technology.

A feasibility study should define the features of the plant such as infrastructure, factory and other
buildings and civil works and their relationship with utilities, material flows, machinery installation
and other aspects of plant construction and operations. It is then necessary to identify the alternative
technologies that can be utilized. Thus, project engineering covers a wide range of interrelated
activities that have to be carefully planned and assessed and effectively coordinated in terms of their
timing and application.

Technology
An important factor in determining the production programme and plant capacity is the technology
and know-how to be utilized in the project. Specific processes are often related to certain levels of
production or become technically and economically feasible only at such levels. The nature of
technology choice and usage constitutes a key factor in the determination of plant capacity.

 Technology Choice
The selection of appropriate technology and know-how is a critical element in any feasibility study.
Technology choice must be directly related to market, resource, environmental conditions, and the
recommended strategies for a particular project. The selection should be based on a detailed
consideration and evaluation of technological alternatives. Appropriate technology refers to those
methods of production which are suitable to local, economic, social, and cultural conditions.

The advocates of appropriate technology urge that the technology should be evaluated in terms of the
following questions:

a) Whether the technology utilizes local raw materials

b) Whether the technology utilizes local manpower?
c) Whether the goods produced cater to the basic needs?
d) Whether the technology protects ecological balance?
e) Whether the technology is harmonious with social and cultural conditions.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 1
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
The choice of technology is influenced by a variety of considerations:

1. Plant capacity:- Often, there is a close relationship between plant capacity and production
technology. The technology should be chosen in such a way that it meets the expected
capacity.

2. Principal inputs:- The choice of technology depends on the principal inputs available for the
project. For example, the quality of limestone determines whether the wet or dry process
should be used for a cement plant.

3. Investment outlay and production cost:- The effect of alternative technologies on investment
outlay and production cost over a period of time should be carefully assessed for the selection
of technology.

4. Product mix:- The technology chosen must be judged in terms of the total product mix
generated by it, including saleable by-products.

5. Latest developments:- The technology adopted must be based on latest developments in order
to ensure that the likelihood of technological obsolescence in the near future, at least, is
minimized.

6. Ease of absorption:- The ease with which a particular technology can be absorbed can
influence the choice of technology. Sometimes a high level technology may be beyond the
capacity of a developing country with may lack trained personnel to handle that technology.

7. Environmental Impact An important aspect in technology selection is represented by the

ecological and environmental impacts. Accordingly the following should be considered:

-Possible hazards that may result from the use of particular technologies,

-The measures required to mitigate the use of hazardous technology choice,

-Specific measures need to be prescribed for pollution control, etc.

 Technology Acquisition and Transfer

The acquisition of technology form some other enterprise may be by way of:
1. Technology licensing
2. Outright purchase, and
3. Joint venture agreement

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 2
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Civil Engineering Works

The feasibility study should provide plans and estimates for the civil works related to the project. This
should cover site preparation, factory & other buildings, and civil works relating to internal roads,
fencing, waste disposal, etc.

 Site Preparation
 Site preparation covers:
1. Grading and leveling of the site
2. Relocation of existing pipelines, cables, etc.
3. Connections for utilities, and
4. Other site preparation and development works.

 Buildings
 Buildings may be divided into:
1. Factory or process buildings,
2. Ancillary buildings required for stores, laboratories, utility
supply centers, maintenance services, and others,
3. Administrative buildings,
4. Staff welfare buildings such as clinic, canteen etc, and
5. Residential buildings.
 Outdoor Works:
 Outdoor works cover:
1. Supply and distribution of utilities
2. Handling and treatment of wastages
3. Transportation and traffic arrangements
4. Outdoor lighting and
5. Enclosure and supervision (fence, gates, doors, security posts etc.)

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 3
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
FINANCIAL ANALYSIS

It helps to measure the financial viability of a project under prevailing market conditions.
 Working Capital Estimate
It is necessary for arranging finance well in advance. It also helps in choosing the best means of
finance.
Example
If inventory is sold out within 60 days, how many times the inventory changed with in a year?
 360/60 = 6
 { 60 days are the minimum coverage days of inventory,
6 is coefficient of turn over (CTO)
Illustration
 Assuming the ff days of coverage for the ff items, compute the W.C requirements of a
project.

Minimum Constr- Annual Requirement

Item days of uction
2006 2007 2008 2009
coverage period
Cash 30 days - 6,000 12,000 12,000 24,000
R.M 90 days - 12,000 16,000 20,000 20,000
Spare part 120 days - 3,000 9,000 9,000 12,000
A/R 80 days - 9,000 18,000 27,000 27,000
WIP 60 days - 3,000 9,000 12,000 18,000
F.G 40 days - 18,000 18,000 27,000 36,000
A/P 160 days - 9,000 13,500 15,750 20,250
 2000 (Total N.W.C for the construction Period.)

Required 1) Compute the Net W.C Requirements.

2) Compute the increase in Net W.C Requirements.
Solution
Net Working Capital Requirements
Constru
Item CTO ction 2006 2007 2008 2009
Period
Cash 360/30 = 12 - 6000/12 = 500 12000/12=1000 12,000/12=1000 24,000/12= 2000
R.M 360/90 = 4 - 12,000/4 =3000 4000 5000 5000
Spare parts 360/120 = 3 - 3000/3 =1000 3000 3000 4000
A/R 360/80 = 4.5 - 9000/4.5 =2000 4000 6000 6000
WIP 360/60 = 6 - 3000/6 = 500 1500 2000 3000
F.G 360/40 = 9 - 18,000/9 =2000 2000 3000 4000
Total C.A ----------------- ----------- 9000 15,500 20,000 24000
A/P 360/160= 2.25 9000/2.25 = 4000 6,000 7000 9000
Net W.C ----------------- 2000 5000 9500 13000 15000
 In working Cap
Requirements 2000 3000 4500 3500 2000

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 4
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
PROJECTED CASH FLOW STATEMENTS (PCFS)]

Example
Prepare projected CFS & B/S from the ff information:

1))
Balance Sheet at the end year “n”
ASSETS LIABILITIES
Cash 25,000 C. Liabilities 50,000
Receivables 40,000 L.T Liabilities 90,000
Inventories 35,000 Total Liabilities 140,000
Total C.A 100,000 SHE
Fixed Assets 150,000 Common Equity 80,000
R.E 30,000
Total Equity 110,000
Total assets 250,000 Total liab& SHE 250,000

2)) Projected I/S for the year

Sales 120,000
CoGS 80,000
Depreciation 6,000
EBIT 34,000
Interest 4,000
EBT 30,000
Tax 10,000
EAT 20,000
Dividend 5,000
R.E 15,000

3)) Additional Information:

 During the year “n + 1” the firm plans to raise a L.T. L of 50,000 and to repay a previous L.T
L of 5000,
 The firm plan to acquire F.A worth 25,000 & increase its inventories by 20,000,
 Receivables are expected to increase by 10,000,
 Other assess, except cash, would remain unchanged.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 5
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Solution
 Step One: SOURCE AND USE OF FUNDS STATEMENT (PROJECTED C.F.S)
Sources
EBT with interest added back (EBIT) 34,000
Depreciation 6,000
L.T.L 50,000
Total sources 90,000
Use
Payment of interest 4,000
Payment of Tax 10,000
Payment of Dividend 5,000
Payment of L.T. Loan 5,000
Purchase of F.A 25,000
Increase in inventories 20,000
Increase in A/R 10,000
Total use 79,000
Cash surplus 11,000
End Cash Balance
Beginning Cash Balance 25,000
Plus Cash Surplus (Source - Use) 11,000
Ending Cash Balance 36,000
 Points to remember:
Net Cash Flows = NI (EAT) + Depreciation Operating Income = EBIT
Decrease in any asses is Source of fund. Increase in any asses is Use of fund (Except cash).

 Step Two: PROJECTED B/S FOR THE YEAR “ N + 1”

Beg Bal. Changes End. Bal.

Assets
Current Assets
Cash 25,000 11,000 (Inc.) 36,000
Receivables 40,000 10,000 (Inc.) 50,000
Inventories 35,000 20,000 (Inc.) 55,000
T.C.A 100,000 ----- 141,000
F.A 150,000 25,000 (Inc.)
6,000 (Dec.) 169,000
Total Assets 250,000 310,000
Liabilities
Current Liabilities
A/P 50,000 ----- 50,000
L.T.L 90,000 50,000 (Inc.)
5,000 (Dec.) 135,000
Total Liabilities 140,000 185,000
SHE
Capital 80,000 ----- 80,000
R.E 30,000 15,000(Inc.) 45,000
T. SHE 110,000 125,000
T.L plus SHE 250,000 310,000

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 6
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
MULTI-YEAR PROJECTIONS
A new project is planned and set up to manufacture a product. The expected out lay & proposed
financing during the construction & the 1st 4 operating years are shown below:

 Proposed Out Lays and Financing of the Project:

OUT LAYS (Spending)Cons. Pd 1st year 2nd year 3rd year 4th year
Preliminary Exp.(Inv.) 50 - - - -
Current Assets 100 50 25 75 125
F.A 100 75 100 - 50
FINANCING
Short term loan - 25 40 30 50
L.T. Loan 100 125 - - 75
Share cap. 200 - 75 50 -

PROJECTED REVENUES & COSTS

1st y 2nd y 3rd y 4th y
Sales 150 250 300 400
Cost of Sales (Excluding Int. & Depn.) 175 200 200 250
Depreciation 15 20 20 30
Interest 10 15 20 30

Additional Information
1.Preliminary expense will be written off in 5 equal installments beg. from the 3rd yr.
2.Losses are carried forward for future tax deduction. It may be deducted as well.
3.Tax is payable @ 20% from the 1st y., but the tax rate from the 4th y. is 50%.
4.No dividend is paid in the 1st two years. 50% dividend will be paid from the 3rd year.

SOLUTION
 Step One: PROJECTED INCOME STATEMENT
1st y 2nd y 3rd y 4th y
Sales 150 250 300 400
Cost of Sales (Excluding Int. & Depn.) 175 200 200 250
Depreciation 15 20 20 30
Interest 10 15 20 30
Writing off of Preliminary Expense - - 10 10
Loss Absorbed - 15 35 -
EBT (50) - 15 80
Tax - - 3 40
EAT (50) - 12 40
Dividend - - 6 20
Retained Earnings - - 6 20

 Loss Absorbed and Preliminary Expense Written off are non cash expenses. They are
Source of Funds.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 7
 Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
 Step Two: PROJECTED CASH FLOW STATEMENT
Sources Cons. Pr. 1st Y. 2nd Y 3rd Y 4th Y.
EBT with Int. added back - (40) 15 35 110
Loss absorbed - - 15 35 -
Preliminary Exp. written off - - - 10 10
Depreciation - 15 20 20 30
Short Term Loan - 25 40 30 50
Long Term Loan 100 125 - - 75
Share Capital 200 - 75 50 -
Total Sources 300 125 165 180 275
Uses
Payment of Interest - 10 15 20 30
Payment of tax - - - 3 40
Payment of dividend - - - 6 20
Preliminary Expense 50 - - - -
Current Asset 100 50 25 75 125
Fixed Assets 100 75 100 - 50
Total Uses 250 135 140 104 265
Ending Cash Balance
Beginning Cash - 50 40 65 141
Surplus/Deficit 50 (10) 25 76 10
Ending Cash Balance 50 40 65 141 151
 Step Three: PROJECTED BALANCE SHEET
Cnstr.Pd 1st y 2nd Y 3rd Y 4th Y
Assets
Cash 50 40 65 141 151
C.A 100 150 175 250 375
P.E (Preliminary exp.) 50 50 50 40 30
Loss carried for ward - 50 35 - -
F.A 100 160 240 220 240
T.A 300 450 565 651 796
Liabilities & Capital
S.T.L - 25 65 95 145
L.T.L 100 225 225 225 300
Share Cap. 200 200 275 325 325
R.E - - - 6 26
T.L & Capital 300 450 565 651 796

BREAK EVEN ANALYSIS

Example
A project plan to operate at 50% of its capacity in the 1st year; 80% in the 2nd year; & 90% in
the 3rd year.
 Estimate for the 3rd year:
Sales 5000 units @ 10 = 50,000 BEP = FC/CM(unit)
VC = 25,000 CM = SP/unit - VC/unit
FC = 10,000 CM in Birr = T.S. Revenue – T.V.C

SP/unit = 10
VC/unit = 5
CM=10-5 = 5
CM in Birr= 50,000-25,000 = 25,000
Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 8
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

1.
1))BED (unit) 10,000
BEP(unit) = 2000 units.
= FC/CM(unit) 10,000 = 2,000 units.
10-5 10-5
Or
ORFC x T prodn=
FC X 10,000 X 500= = 2000
T. production units X 5000 = 2000 units
10,000
T.Cm (in birr)
T.CM (in birr) 50,000 -25,000 50,000 -25,000

2))BEP(in Birr) = BEP(in unit) X SP/unit

2000 X 10 = 20,000 Birr.
OR BEP(in Birr) = FC/T.C.M X T. Sales Revenue
10,000 X 50,000 = 20,000 Birr.
25,000
3))BEP(in terms of capacity) = FC/CM X Rated Capacity
10,000/25,000 X 90 = 36%
OR BEP X 0.9 = 2000 X 0.9 = 0.36
T. Unit 5000
OR BEP(birr) X 0.9 = 20,000 X 0.9 = 0.36
T.Rev. 50,000

Rated Capacity = the maximum capacity you operate, not you can
operate, b/c you can operate 100%

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 9