Homework: Advanced Project Planning and

Evaluation [PECON 812]

CHAR
I
BOR
U SUBMISSION DATE: 30-June-2023

BER BULE HORA UNIVERSITY

ISO ETHIOPIA
 Part I: SUBJECTIVE QUESTIONS
1. Write and define the key management knowledge areas in project identification and
analysis
The Key Management Knowledge areas in project identification and analysis are the following:
I. Project Integration Management

It integrates the three main project management processes of:

 Planning
 execution &
 control
II. Project Scope Management

It includes the processes required to ensure that the project includes all the work required, only the work
required, to complete the project successfully. It consists:

 Authorization
 scope planning
 Scope definition
 Scope change management
 Scope verification
III. Project Time Management

The Project Time Management is the processes required to ensure timely completion of the project.

It consists of:

 Activity definition
 Activity sequencing
 Activity duration estimating
 Schedule development & schedule control schedule development & schedule control

IV. Project Cost Management

It refers to processes required to ensure that the project is completed within the approved budget. It
consists of:

 Resource planning
 Cost estimating
 Cost budgeting
 Cost control

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 V. Project Quality Management

It is the processes required to ensure that the project will satisfy the needs for which it was undertaken.
It consists:

 Determining the required condition

 Quality planning
 Quality assurance
 Quality planning &
 Quality control
VI. Project Human Resource Management

The processes required to make the most effective use of the people involved with the project. It
consists of:

 Organizational planning
 Staff acquisition
 Team development

VII. Project Communications Management

It required ensuring timely and appropriate generation, collection, dissemination, storage, and ultimate
disposition of project information. It consists of:

 Communications planning
 Information distribution
 Performance reporting
 Administrative closure
VIII. Project Risk Management

The process of identifying, analyzing, and responding to project risk. It includes:

 Risk management planning

 Risk identification
 Qualitative risk analysis
 Identification, qualitative risk analysis
 Quantitative risk analysis
 risk response planning
 Risk monitoring and control

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 IX. Project Procurement Management

It refers to acquire goods and services to attain project scope from outside the performing organization.
It consists of:

 Procurement Planning
 Solicitation Planning
 Contract Planning
 Solicitation
 Source Selection
 Contract Administration
 Contract Closeout.

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 2. What are the bodies of knowledge to determine the deliverable objectives of the project?

The body of knowledge can be subdivided into four core elements which determine the deliverable
objectives of the project. These are:

 Quality/Performance: The Project needs to produce quality products to

maximize the satisfaction of the users.
 Cost: Activities consumes human, financial and material resources.
 Time: Any project should be time bounded. It has a start and end time.
 Scope: The extent of the problem or opportunity that the project needs to
address.

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 3. What is the difference between projects and programs?
The Difference between PROJECT AND PROGRAMS Are Identified On THE FOLLOWING
Basics of Comparison

Basics For
Comparison
Project Program
Refers to the temporary activity, which is undertaken to create a Implies a set of projects which are linked to one another, in a
Meaning
distinct product or service that has certain objective. sequential manner to attain the combined benefits.
Focus on Content Context
Time Horizon Short term Long term
Concerned with Specific deliverables, product or service Benefits that is received
Functional Unit Single Multiple
Tasks Technical in nature Strategic in nature
Produce Output Outcome
Success can be measured in terms of product quality, timeliness,
Success is measured by the extent to which program meets
Success cost-effectiveness, compliance and degree of customer
out the needs and benefits, for which it conducted.
satisfaction.
Scope Narrow Wide and can comprise of many projects as components.
Degree of concern Specific and detail Comprehensive and general
Goal Precise Broader
Calculation Possible to calculate costs and returns Difficult to calculate costs and returns

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 4. What are the types of stakeholder and their basic premises in project analysis?

Stakeholders: Individuals or institutions that may – directly or indirectly, positively or negatively –

affect or be affected by a project or program. Any individuals, groups of people, institutions or
firms that may have a significant interest in the success or failure of a project (either as
implementers, facilitators, beneficiaries or adversaries) are defined as ‘stakeholders’.

1. Beneficiaries: Are those who benefit in whatever way from the implementation of the project.
Distinction may be made between:
I.1 Target group(s): The group/entity who will be directly positively affected by the project at
the Project Purpose level. This may include the staff from partner organizations;
I.2 Final beneficiaries: Those who benefit from the project in the long term at the level of the
society or sector at large, e.g. “children” due to increased spending on health and education,
“consumers” due to improved agricultural production and marketing.
2. Project partners: Those who implement the projects in-country (who are also stakeholders,
and may be a ‘target group’).

The basic premise behind stakeholder analysis is that different groups have different:

 Concerns
 Capacities and
 Interests

These issues need to be explicitly understood and recognized in the process of:

 Problem identification
 Objective setting and
 Strategy selection.

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The key questions asked by stakeholder analysis are therefore:

 ‘Whose problems or opportunities are we analyzing’ and

 ‘Who will benefit or loose-out, and how, from a proposed project
intervention’?

The ultimate aim being to help maximize:

 Social
 Economic and
 Institutional benefits of the project to target groups and ultimate
beneficiaries, and minimize its potential negative impacts (including stakeholder
conflicts).

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 5. What is the aim of identifying a problem?
Aims of Identifying Problems

The aim of identifying the problem is to identify and describe the problems that are preventing the goals
and objectives of defined in the previous step from being achieved.

Problem identification provides the platform for investigating a broad range of interventions and
generating options.

The following are some of the aims of identifying the problems:

It helps you to identify what the key issues are and where you might best apply your resources to
achieve the most impact.

a) Get the objectives, scope and requirements right

 If the project doesn’t start with a well-defined problem, it will be harder to get accurate
objectives, scope and requirements. This will often translate into the final solution not meeting
the business and user’s needs-because how can you satisfy a need if you aren’t truly sure what
that need entails?
 Taking the time to identify the problem up front will lead to a better solution more efficiently
than trying to quickly implement the first solution that comes to mind.

b) Save Time and Money

Albert Einstein once said, “If I were given one hour to save planet, I would spend 59 minutes defining the
problem and one minute resolving it.”

 If you take the time to identify and define the problem before jumping into
action, you will often be able to provide a solution that meets the unique needs
of the organization. Doing it this way will help you solve their pain points more
efficiently and save you and your clients time, Money and resources.

c) How the Problem Solving is Initiated

Problem solving is an important form of critical thinking. It’s part of our role as business analyst to
recognize and acknowledge challenges and opportunities and commit ourselves to resolving them. During
the process, we periodically be asking ourselves, what problems are solving and why is it important? Being
clear on the problem and why we are tackling allows us to identify the problem at its root and devise a
solution that will most efficiently and effectively meet the needs of the business.

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 6. What is the difference between preparing project feasibility and business plan?

THE DIFFERENCE BETWEEN PROJECT FEASIBILITY AND BUSINESS PLAN

PROJECT FEASIBILITY BUSINESS PLAN

 The feasibility study provides an  The business plan provides a planning

investigating function
 Answers the question: is the project viable?
 The feasibility study outlines and analyses
several alternatives or methods of achieving
project success. Therefore it assists to narrow
the scope of the project to identify the best
project scenario(s) to about two or three.
The feasibility study is conducted before the
business plan
 It is a decision point; to continue or not
based on the outcome.
 Feasibility provides information to
choose, the blue print or print road map.
function.
 Lays out the actions to be taken to bring
the ‘ideas’ to ‘reality’.
 The business plan focuses on only one
alternative or scenario.
 A business plan is prepared only after the
business venture has been deemed to be feasible.
The outcome does not provide information to
continue or drop the project.
 The business plan provides a blue print or
road map.

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 7. What are the classical arguments of “Doing and Not Doing” project feasibility analysis?
What is your argument?

Arguments In-favor of Doing Feasibility

 Once decisions have been made about proceeding with a proposed business, they are often
very difficult to change. An entrepreneur may have to live with these decisions for a long time.
 Successful businesses thoroughly examine all of the issues and assess the probability of
business success first before going into it.
 Feasibility studies gives focus to the project and outline alternatives and narrow project
alternatives
 Feasibility studies bring to the fore new opportunities through the investigative process.
 They identify reasons not to proceed.
 They enhance the probability of success by addressing and mitigating factors earlier on that
could affect the project.
 Feasibility studies provide quality information for decision-making.
 They help to increase likelihood of finding funds and investors for the project.
 And provide documentation that the business venture was thoroughly investigated.
 Helps to attract equity investments

Arguments Agaist doing Feasibility…

 ‘We know it’s feasible; an existing business is already doing it.’

 Feasibility has been done a few years ago so there is no need to do another one.
 Feasibility studies are just a way for consultants to make money.
 The business is too small for a feasibility study.
 Some scholars raise the issues against doing feasibility in the following manner:
 The market analysis has already been done by the business that is going to
supply the equipment.
 By hiring a general manager, the study can be accomplished.
 Feasibility studies are a waste of time.
 Money is to be spent on building, tie up the site and bid on the equipment; why
spend money on feasibility.

And in my argument I support doing the feasibility study because, the world’s business is dynamic in
nature. And feasibility study is critical in the business assessment process. If properly
conducted, it may be the best investment you ever made.

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 8. What are the main component parts of feasibility analysis?

The main components of Techniques and stages for feasibility study are:

EIA Analysis
Situational
Risk Analysis
Analysis

Social Organisational
Analysis Analysis

Feasibility
Analysis
Components
Political Economic
Analysis Analysis

Financial Technical
Analysis Analysis
Market
Analysis

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 9. What are the criteria and what are not to organize and recruit staffs for the right institutions
to facilitate project implementation?

Project Analysis Must Make A Detail Analysis Of Project Organization And Management. This
Analysis Aims At Answering The Following Questions:

 Is the organizational set-up of the project adequate?

 Will the project be provided with competent personnel to manage it?

The first question is about the proposed organization chart of the implementing agency. The latter question
aims at ensuring that adequate project staff can be recruited locally or overseas. The problem of project
staffing raises many other questions:

 Is local manpower market enough to provide the project with the required manpower?
 Can competent staff be recruited freely?
 Should they be recruited locally or overseas?

But even if the right staff is available, their success will depend mostly on the institutional set-up i.e., the
relationship between the various organizations involved with the implementing agency. Appraising
organization therefore includes appraisal of the project related institutions like subsidiary companies,
ministries, headquarters, banks, transport companies and others.

 What are the regulations or procedures?

 What are the policies – that favor and disfavor the project?
 Once the right institutions to facilitate project implementation are available, the project
should be implemented by
 Competent
 Responsible and
 Committed managers. This requires arrangement of adequate incentives to attract competent
managers.

Managerial appointment should be a function of competence and commitment, not a function

of:

 Race
 Tribe
 Creed or
 Political opinion.

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 10. What is market analysis in project feasibility study?

Market Analysis in Project Feasibility Study

A market is the arena for interaction among buyers and sellers. From seller’s point of view, market
analysis is primarily concerned with the aggregate demand of the proposed product/service in future and
the market share expected to be captured.

Market or Demand and Supply Aspect Needs to ensure the existence of effective demand at
remunerative price. It also assesses possible means in which the market will absorb the output without
affecting the output price and if price inevitably be affected, we would have to assess its magnitude.
Similar arrangements need to be done on the input side too (including procurement of equipment and
intermediate input supplies). Market analysis is basically concerned with two questions:

 What would be the aggregate demand of the proposed product/service in future?

 What would be the market share of the project understudy?

To answer the above two questions the project analyst requires a wide variety of information and need
to use appropriate forecasting methods. The kinds of information required are:

 Consumption trends in the past and the present consumption level

 Past and present supply positions
 Production possibilities and constraints
 Imports and exports
 Structure and competition
 Costs structure
 Elasticity of demand & supply
 Consumer behavior
 Intentions
 Attitudes
 Preferences, and
 Requirements
 Distribution channels and marketing policies in use
 Administrative
 Technical, and
 Legal constraints impinging on the marketing of the product.

Given the importance of market and demand analysis, it should be carried out in an orderly and
systematic manner.

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 11. What is the difference between financial and economic analysis in project analysis?

The difference between FINANCIAL AND ECONOMIC analyses in project analysis

Basics for
Financial Analysis Economic Analysis
Difference
Part of project benefit, treated as transfer payments
Taxes Treated as costs to the project
and not to be considered as cost.
Cost to society because it is expenditure of resources
Subsidies Treated as returns to the project by expenditure of resources by government thus from
society
Prices adjusted to reflect economic or social values;
Prices Market prices the prices are ‘shadow’ or accounting prices. Subsides
and taxes are used in the adjustment.

Treated thus: interest paid to capital suppliers external to

the economy is subtracted from benefits. The result is what
Interest on
is available to owners of capital. Interest imputed to the Used as quoted. It is total return to society
capital
entity from whose dimension entity from whose dimension
analysis is being done is part of total return not cost.

Prepared from the viewpoint of an individual; person, From the viewpoint of the economy or society as a
View points
company etc. whole.

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 12. What is risk analysis in project feasibility study?

Risk analysis involves examining how project outcomes and objectives might change due to the impact of
the risk event. Once the risks are identified, they are analyzed to identify the qualitative and quantitative
impact of the risk on project so that appropriate step can be taken to mitigate them.

The process of identifying the risks to system security and determining the probability of occurrence, the
resulting impact, and the additional safeguards that mitigate this impact. Part of risk management and
synonymous with risk assessment.

It is an analysis which is done by determining the preliminary feasibility study before it is influenced by
risks and treatment (before process). Then, the study is done with calculating risk without treatment (in
process). Finally, the final feasibility study is analyzed by including treatment to the previous study (after
process).

The uncertainty depends on many risk factors. The influence of the identified risk then has to be evaluated
and calculated towards the project feasibility. Before investment, the feasibility of the project has to be don
that gives figures of cash flows on the following years.

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 13. What are the criteria/models of selecting and appraising a project?
I. Models of Selections
1. Non-numeric Models of Project Selection
 The Sacred Cow
 The Operating Necessity
 The Competitive Necessity
 The Product Line Extension
 Comparative Benefit Model
 Q-Sort Model
2. Numeric Models of Project Selection
 Undiscounted Cash Flow
 Payback Period
 Average Rate of Return
 Return On Investment (ROI)
 Discounted Cash Flow
 NPV
 Internal Rate of Return (IRR)
 Profitability Index (=NPV/I ratio) or
 B/C Ratio
II. Criteria Of Project Selections
 Realism - reality of manager’s decision
 Capability- able to simulate different scenarios and optimize the decision
 Flexibility- provide valid results within the range of conditions
 Ease of Use - reasonably convenient, easy execution & understood
 Cost - Data gathering and modeling costs should be low relative to the cost
of the project
 Easy Computerization - must be easy and convenient to gather, store and
manipulate data in the model

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 14. What is cost to a project owner?

Owner’s Cost of Project

Owner’s cost is the cost that includes:

It is incurred for which the goods (services) are believed to serve the project for a long period of time. It
represents the total of all items of outlays associated with a project which are supported by long term
funds. It is the sum of the outlays on the flowing:

Owner’s cost is the cost that includes:

 A land and site developments,

 Financial cost (funding cost),
 Building and civil works
 Plant and machinery costs
 Technical and knowledge fees
 Initial cash losses
 Miscellaneous fixed assets
 Owner’s third party cost including engineering studies,
 Permits, licensing fees, training, and
 Owner’s corporate costs etc.

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 15. What is a cost that is not considered both in financial and economic analysis?

Economic cost has a broader scope since it includes the opportunity cost. Accounting cost
doesn’t include the opportunity cost of not choosing a particular alternative.

 Sunk Costs are those costs that a company has committed to and are unavoidable or
unrecoverable costs. Sunk costs are excluded from future business decisions because
they will remain the same regardless of the outcome of a decision.

When we look at what FINANCIAL AND ECONOMIC COST, in another way round we are looking
or understand at what they are not. So let look what they are in meaning.

ECONOMIC COSTS are the opportunity cost of resources (i.e. the value of the highest-
value alternative use). FINANCIAL COSTS, meanwhile, are resources that are “paid for”
(a turn of phrase borrowed from the health sector).

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 16. What are the Reasons in favor of industrial policy in developing countries?

Arguments In-favor of ….

Justification for Industrial Policy (IP) is based on the fulfillment of three main conditions (Harrison
and Rodríguez-Clare, 2010):

 Market Failure is present (e.g., industry-level externalities, dynamic increasing returns, the
presence of a public good, etc.); The rationale for selective industrial policy (i.e. policies
intended to promote specific industries as against general policies to promote
industrialization) has been made in terms of “market failures” that arise when competitive
markets either do not exist or are incomplete, in situations, for example, when there are
information asymmetries, scale economies, or externalities.
 Sector Competitive Capacity: the firm/sector is potentially competitive in the international
markets. And Existing productive capacity represents a certain level of productive efficiency
but competing in the world market requires that this level be continually raised. Part of the
process of structural transformation and technological improvement is autonomous and may
be facilitated and promoted by the market as investors seek out profitable opportunities. But
this may be too slow a process in relation to a country’s own growth aspirations or in relation
to technological improvements occurring elsewhere.
 Social Benefit Is Greater: the discounted future benefits of intervention exceed the costs of
the distortion. Since the absolute level of productivity and its potential for growth vary across
activities, a country’s ability to catch up with the more advanced countries is largely
dependent on what it produces and sells in the world market. Economic development implies
structural transformation, typically from low productivity to high productivity activities, from
agriculture and simple manufacturing activities to modern industry.
 Industrial policies (IP) help the country’s economy maintain a balance of imported
and exported goods.

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 17. What are reasons for against industrial policy?

The Arguments AGAINST...

There are main arguments against the use of Industrial Policy (IP) in developing countries.

1ST This what even in the presence of highly imperfect markets, there is no reason to suppose that the
government has better access to information with respect to the market. Since government information is
necessarily limited, good selectivity is impossible, which implies for instance—that the “PICKING
WINNERS” strategy is deemed to fail (Pack and Saggi, 2007).

2ND The other argument against IP comes from the literature on “RENT-SEEKING AND
CORRUPTION” (Krueger 1974; 1990). The basic idea is that since any government measure (import
licenses, investment permits, etc.) creates rents, firms find it profitable to (legally or not) invest their
resources to obtain them. This is a wasteful activity that also distorts allocation of resources because it
makes competition between firms unfair.

3RD It is generally recognized that market prices fail to provide adequate incentives for developing skills
and human capital or to guide investment decisions needed for structural transformation of developing
economies. In such situations, policies are needed occasionally to reinforce, other times to counteract, the
al-locative effects of market signals, or what Alice Amsden has called “GETTING PRICES WRONG”.
Prices are at any rate “distorted” even without state intervention when conditions for perfect markets do not
prevail, which is usually the case.

5TH Rodrik (2004:3) emphasizes that what matters is not so much the specification of the outcome as the
process through which policy decisions are made. He notes: “The ‘RIGHT MODE’L for industrial policy
is not that of an autonomous government applying Pigovian taxes or subsidies [i.e. lump sum taxes or
subsidies], but of strategic collaboration between the private sector and the government with the aim of
uncovering where the most significant obstacles to restructuring lie and what type of interventions are most
likely to remove them.”

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6TH Finally, with respect to the assertion that “INFANTS NEVER GROW UP,” two points may be made.
One, a number of “infants” in developing countries actually did mature into competitive, world class
industries; examples range from garments to sophisticated electronic equipment in different parts of the
developing world. Two, there is really no specific moment when industrial development can be considered
as successfully accomplished, for, in the competitive world, “success” is constantly under challenge.
Established industries and firms frequently go through difficult periods, and governments take risks in
supporting or not supporting them. Thus, it was under the Reagan administration – the foremost champion
of neoliberalism – that Harley-Davidson Motor Company and Chrysler Corporation were saved from
bankruptcy. Similarly, aircraft manufacturing in Brazil, pharmaceuticals in India, and automobiles in South
Africa – which are regarded today’s success stories – also went through difficult and trying times that
necessitated government rescue measures.

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 18. What are the theoretical tools for growth, development and social progress in developing
countries?
The theoretical models for Development of LDCs are:

a) Harrod-Domar Model: The model was developed by economists Roy Harrod and Evsey Domar
in the 1930s and 1940s. The basic idea of the Harrod-Domar model is that economic growth
depends on the amount of capital that is available for investment, and that the rate of capital
accumulation is proportional to the rate of savings. It is argued that in developing countries low
rates of economic growth and development are linked to low saving rates.
b) Linear programming Model: It is the mathematical modeling technique in which a linear
function is maximized or minimized when subjected to various constraints. This technique has
been useful for guiding quantitative decisions in business planning, in industrial engineering, and
—to a lesser extent—in the social and physical sciences.
c) Solow Growth Model: Specifically, the Solow growth model suggests that income levels in poor
economies will grow relatively faster than developed nations and eventually converge or catch up
to these economies through capital accumulation… But, with just a few exceptions, that is not
happening. The Solow growth model focuses on long-run economic growth. A key component of
economic growth is saving and investment. An increase in saving and investment raises the
capital stock and thus raises the full-employment national income and product. The
model explains growth of output in a neoclassical context.
d) Aggregate or General Model: An Aggregator Model is a networking E-commerce business
model where a firm, known as an Aggregator, collects (or aggregates) data pertaining to goods
and/or services offered by several competing websites or application software (commonly known
as apps) and displays it on its own website or application software.
The examples of Aggregate Models are:

 Crushed rock - These products are obtained by extracting rocks and crushing them to the desired
size and texture. ...
 Sand - Sand is found in nature. ...
 Gravel - Gravel deposits are produced by a natural process of moisture and erosion.
There are also other models of growth and Development for LDCs, but the most frequently used are those
who mentioned here.

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 19. Write the key operational principles of industrial policy
Key Operational Principles of Industrial Policy [IP]
KEY PRINCIPLES
a) Give the baton (stick) to the
“real” sector ministries.
b) Promote medium- and
long-term strategic thinking on
policy.
c) Each priority area or
activity in a strategy should have
at least one dedicated
implementing agency.
d) The more structured and
specific a strategy, the greater the
need for coordination among
ministries and agencies and the
more likely it is that higher-level
coordination will not be enough.
e) For medium- and long-
term strategies to be effective,
public sector personnel must be
highly professional, career-
oriented, and non-politicized.
f) The effective application
of incentives must be assessed
not only by how they are
individually managed but also by
how they are coordinated for a
systemic effect.
KEY ISSUES WITH RESPECTO PRINCIPLES
a) Technical leadership of an industrial policy must be in the
hands of key ministries (e.g. industry ministry, or trade and industry
ministry) and executing agencies.
b) This point emphasizes the importance of allowing ministries
and executing agencies sufficient time to design and implement an
industrial policy. Like governments themselves, bureaucratic units
can get trapped into a short-term mentality that discourages strategic
thinking and careful action.
c) While acknowledging the problem of coordination, effective
industrial policy requires dedicated specialized units to manage and
oversee an industrial policy program. Each main function required in
the industrial policy might best be assigned to a responsible agency.
d) Coordination of an industrial policy program is a difficult
task in practice, but its implementation can be facilitated by
establishing a clear mandate and hierarchy of functions for each
agency involved.
e) Competent and meritocratic bureaucracies are widely seen as
a linchpin for the success of industrial policy. This requires
competitive recruitment, above-average salary and/or working
conditions, extensive life-long (technical) training, and promotion by
merit, and insulation from politicization.
f) Sectors and activities are often interconnected. Coordination
of incentives across agencies is therefore important to guarantee
policy coherence and maximize the long-term impact of industrial
policies.
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 20. What are the key policy domain and policy instruments for sustainable industrial development
in developing countries?

The Key Policy Domain and Policy Instruments for Sustainable Industrial Development in
LDCs

KEY Policy Domains

a) Product Market Policy Instruments for LDCs

I. Market Based
b) Labor Market
a) Import tariffs, export subsidies, duty drawbacks, tax
credits, investment/FD/ incentives
c) Capital Market b) Wage tax credit /subsidies, training grants
d) Land Market
c) Directed credit, interest rate subsidies
d) Subsidize rental

PART II: WORKOUT QUESTIONS (20%)

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 Table 1 of Part II. Project A and B’s Cash Flows

Project A& B's PVCash flows

Years Project A’s Cash Flows Project B’s Cash Flows DF&NPV@10%
A B
0 600 548 1.000 600.000 548.000
1 245 270 0.909 222.727 245.455
2 245 270 0.826 202.479 223.140
3 245 270 0.751 184.072 202.855
4 245 270 0.683 167.338 184.414
PV 3.170 776.617 855.864
NPV 2.170 176.617 307.864

Assume a discount rate of 10%, Use discount factor and annuity table attached to this.

Compute:

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 1) Payback period [PBP] (assume further that 600 and 548 are investment costs)

Table 2 of Part II. Project A and B’s Payback

Pro je ct A’s Ca s h Cu m m u la tive Pro je ct B’s Ca s h Cu m m u la tive

Ye a rs Ye a rs
Flo ws Ca s h Flo ws Flo ws Ca s h Flo ws

0 -600 -600 0 -548 -548

1 245 -355 1 270 -278
2 245 -110 2 270 -8
3 245 135 3 270 262
4 245 380 4 270 532
Pa y ba c k Pe rio d fo r
Pa y ba c k Pe rio d fo r Pro je c t A 2 .4 5 Ye a rs 2 .0 3 Ye a rs
Pro je c t B

Since the cash flows of the two projects are uniform to calculate Payback period we divide initial
investment to Annual Cash flows or follow the following general formula procedure.

[600−490] 110
PROJECT A → PBP A =2+ =2+ =2+0.449=2.45 Years−−−−−−1
245 245

[600−424.35] 175.65
PROJECT A → DPB A =2+ =2+ =2+0.954=2.954 Years−−−1.1
183.99 183.99

[548−540] 8
PROJECT B → PBP B=2+ =2+ =2+0.030=2.030 Years−−−−−−2
270 270

[548−468.595] 79.405
PROJECT B → DPB B=2+ =2+ =2+0.391=2.391Years−−2.1
202.855 202.855

Therefore Project Accept : PROJECT B

Because → PROJECT B has the shorter payback period than PROJECT A

2) Average Rate of Return[ARR] (assume further that 600 and 548 are investment costs)
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 [ ]
( 245∗4 )−600
AAP [ Average accounting profit ] 4
ARR A [ Accounting rate of returns ] = −−−−−−2 ARR A = ∗100=
ACE [ Average capita employed ] 600
2

Decision Rule : A ccept Project B when Projects A∧B are mutually exclusive .

We loook at Minimum rate of return ¿ decide where¿ accept ∨reject when

the Project isindependent .

3) Discounted net Present Value (NPV)

Table 3 of Part II. Discounted Net Present Values for Two Projects [A &B]

Discounted Net Present Values for the two Projects [A & B]

Discount Factor @10%
Years Project A’s CF Project B’s CF PVA PVB
for both Projects
0 600 548 1.000 600.000 548.000
1 245 270 0.909 222.727 245.455
2 245 270 0.826 202.479 223.140
3 245 270 0.751 184.072 202.855
4 245 270 0.683 167.338 184.414
PV 3.170 776.617 855.864
NPV 2.170 176.617 307.864
This table is formed considering the following Computation

PROJECT A → NPV A =−600+ [ 3.170 x 245 ] =−600+776.617=176.617−−−−−−3.1

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 → NPV A ≥ 0 : Accept when the Project is independent

PROJECT B → NPV B=−548+ [ 3.170 x 270 ] =−548+855.864=307.864−−−−−−3.2

→ NPV B ≥ 0 : Accept when the Projec t isindependent

→ If two projects are mutually exclusive NPV B > NPV A =307 . 864 >176 . 617 ,

Decision Ruleis Therefore

PROJECT A : Rejected

PROJECT B : Accepted

Project ' PROJECT B ' is preferred ¿ project ' PROJECT A ' .

4) Discounted Benefits To Cost Ratio (BCR)/Profitability Index (PI)

PV Benefits 776 . 617
PROJECT A → BCR A = = =1 .295 ≈ 1 .30−−−−4 . 1
PV Costs 600

→ BCR A >1=1. 295 : Accepted when the Project isindependent

PV Benefits −PV Costs 776 . 617−600

PROJECT A → DBCR A = = =0 . 295 ≈ 0 .30
PV Costs 60 0

PV Benefits 855 . 864

PROJECT B → BCR B= = =1. 562 ≈1 . 562−−−4 . 2
PV Costs 548
→ BCR B > 1=1.562>1 : Accepted whenthe Project is independent

PV Benefits 855 . 864−548 307 . 864

PROJECT B → DBCR B=BCR−1= = = =0 . 562 ≈1 . 562
PV Costs 548 548
If two projects are mutually exclusive , BCR B > BCR A=1.562>1.295 ,

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 '
therefore Project ' B will be Accepted∨is preferred ¿ project ' A ' .

BCR Of PROJECT A ∧B [1.295∧1.562]Indicates that each projects creates additional values and as it
should be considered positive respectively.

5) Financial Rate of Return (IRR)

n
B −C t R
IRR=NPV 0 ≅ ∑ t t
+
t=0 [1+r ] [1+r ]n
s
Table 4 of Part II Project A ' [ IRR¿¿ A]¿

29
 Project A’s IRR
Years Discount @20% Discount @25% Discount @23%
Cash Flows
DFA PV DFA PV DFA PV
0 600 1.000 600.000 1.000 600.000 1.000 600.000
1 245 0.833 204.167 0.800 196.000 0.813 199.187
2 245 0.694 170.139 0.640 156.800 0.661 161.941
3 245 0.579 141.782 0.512 125.440 0.537 131.659
4 245 0.482 118.152 0.410 100.352 0.437 107.040
PV 2.589 634.240 2.362 578.592 2.448 599.827
NPV 34.240 1.362 -21.408 1.448 -0.173
We need to find the exact rate of returns that equate NPV to Zero through the formula called
interpolation. And finally we end up with the IRR value of 23%.
Lr Lower rate 20%
Hr Higher rate 25%
Where
LrNPV LR Net present Value 34.240
HrNPV Hr Net Present Value -21.408

Lr NPV
IRR A =Lr + ∗[ H R−Lr ]∗100−−−−−−−−−−−−−−−−−−5 . 1
Lr NPV −H r NPV

¿ 20 %+ 0.615∗0.05=20 % +0.030764=20 % +3.7 %

≈ 23 % is where INPV A of Project becomes approximately Zero

Decision Rule

→ since IRR A > MRR=23 %>10 % : Accepted whenthe Pr oject isindependent

'
→ since IRR A < IRRB =23 % <33 . 98 % : Rejected Project ' A when they are Exclusive .

Where MRR- is stand for minimum rate of return settled.

Table 5 of Part II. Project B’s IRR

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 Project B’s IRR
Discount @33% Discount @33.98% Discount @34%
Years Cash Flows
DFA PV DFA PV DFA PV
0 548 1.000 548.000 1.000 548.000 1.000 548.000
1 270 0.752 203.008 0.746 201.523 0.746 201.493
2 270 0.565 152.637 0.557 150.412 0.557 150.368
3 270 0.425 114.765 0.416 112.265 0.416 112.215
4 270 0.320 86.289 0.310 83.792 0.310 83.742
PV 2.062 556.699 2.030 547.992 2.029 547.817
NPV 8.699 1.030 -0.008 1.029 -0.183

Since 33.98% rate's NPV is -0.008 which is almost or approximately equal to zero, and I don’t need to
go any further to make it exactly Zero. Therefore the IRR for Project ‘B’ is simply considered as
33.98% which is computed through interpolation.
Lr Lower rate 33%
Hr Higher rate 34%
Where
LrNPV LR Net present Value 8.699
HrNPV Hr Net Present Value -0.183

To find the rate which equates NPV B ≈0

LrNPV B
IRR B=PV B −I 0=0∨Lr+ ∗[ Hr−Lr ] %−−−−−−5.2
LrNPV B −HrNPV B

8.699
IRR B=33 % + ∗[ 34−33 ] %=33 % +0.979∗[ 1 ] %
8.699−(−0.183 )

¿ 33 %+ 0.979 x 0.01=0.33+0.0098=0.3398

IRR B =33.98% is where INPV B of Project becomes approximately Zero

Decision Rule

→ since IRR B > MRR=33 . 98 %>10 % : Accepted whenthe Project is independent

'
→ since IRR B > IRR A =33 . 98 %> 23 % : Accepted Project ' B when they are Exclusive

where , MRR is minimim rate of return

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 6) Make decision on the feasibility of the project based on the above criteria
Table 6 of Part II. Rules to be followed while selecting Project

Criteria For Project Selection

Te chnique s For Inde pe nde nt Proje ct For Mutually Exclus ive Proje cts

 When PBP≤ Maximum acceptable PBP: Accepted.

PBP Proje ct with le a st PBP should be se le cte d.
 When PBP ≥ Maximum acceptable PBP: Rejected.
DISCOUNTED
NON-

 When ARR ≥ MRR: Accepted.

ARR Proje ct with the m a xim um ARR should be se le cte d.
 When ARR ≤ MRR: Rejected.
 When NPV>0: Accept
NPV Proje cts with the highe st positive NPV should be se le cte d.
 When NPV<0: Reject
DISCOUNTED

 When PI>1: Accept

PI Whe n NPV is sa m e proje ct with highe st PI should be se le cte d.
 When PI<1: Reject
 When IRR>K: Accept
IRR Proje ct with the m a xim um IRR should be se le cte d.
 When IRR<K: Reject
Table 7 of Part II. Summary of Ranked Projects Based on Decision Criteria

Payback BC/PI
Project's NPV IRR ARR
PBP DPBP BCR DBCR
A 2.45 2.954 176.617 1.295 0.295 23.70% 31.67%
B 2.03 2.391 307.864 1.562 0.562 33.98% 48.50%
Project's Order of Preference
Ranked
Basics of Comparison
1st 2th
Payback Period (PBP) B A
Net Present Value (NPV) B A
Benefit Cost Ratio (BCR) or Profitability Index (PI) B A
Internal Rate of Return (IRR) B A
Accounting Rate of Return (ARR) B A
Decision: Project B fits all the criteria of evaluation and it must be accepted and preferred to ‘A’.

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 7) Which project is highly profitable?

If the projects are INDEPENDET both projects should be accepted. When the projects are mutually
exclusive Project ‘B’ is preferred to ‘A’.

Project ‘B’ is highly profitable because it has the highest Benefit Cost ratio (1.591) or discount benefit
cost ratio (0.591) and highest internal rate of return (33.98%).

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 2) Using LPs−excel Software , Max Z=200 X 1+300 X 2+ 400 X 3 +600 X 4

Subject ¿: X 1+ 2.5 X 2 +3.4 X 3 +1.8 X 4 ≤ 48

2 X 1 +3 X 2 +8 X 3 +2.4 X 4 ≤ 18

2 X 1 +3.1 X 2 +8 X 3 +0.6 X 4 ≤ 36 ,

assuming X 1 , X 2 , X 3∧X 4 ≥ 0

a) Compute the optimal resource

b) Compute optimal Income

Solutions: by putting this in step by step, the output of Excel solver displayed accordingly with
respective Answer report part and sensitivity analysis reports.

Maximizing Problem

Objective Functions The optimum solutions are as follows:

Z=200x1+300x2+400x3+600x =4500 Z=4500
4

Variables
X1 0
X2 0
X3 0
X4 7.5

Constraints Arguments
X1+2.5X2+3.4X3+1.8X4<=48 13.5 48
2X1+3X2+8X3+2.4X4<=18 18 18
2X1+3.1X2+8X3+0.6X4<=36 4.5 36

Optimal Solution According to the output:

X1 = 0 X3 =0

X2 = 0 X4 =7.5

Objective function value = $4500.00

34
 Assume Non-Negativity

Objective cell (Max)

Cell Name Original value Final Value

Z=200X1+300X2+400X3+600X
$B$4 0 4500
4

Variable Cells

Cells Name Original value Final Value Integers

$B$7 X1 0 0 Contin
$B$8 X2 0 0 Contin
$B$9 X3 0 0 Contin
$B$10 X4 0 7.5 Contin

Constraints

Cells Name Cell value Formula Status Slack

$B$13 X1+2.5X2+3.4X3+1.8X4≤48 13.5 $B$13=$C$13 Not Binding 34.5
$B$14 2X1+3X2+8X3+2.4X4≤18 18 $B$14=$C$14 Binding 0
$B$15 2X1+3.1X2+8X3+0.6X4≤36 4.5 $B$15=$C$15 Not Binding 31.5
a) First Resource used +Slack=Constraints=13.5+34.5=48
b) Second Resource used + 0=Constraints=18+0=18
c) Third Resource used +Slack=Constraints=4.5+31.5=36

The slack value is the amount of a resource, as represented by a less-than-or equal to constraint that is
not being used.

35
 Sensitivity Analysis

Variable Cells

Reduced Cost Allowable Allowable

Cells Name Final value Objective Coefficient
(gradients) Increase Decrease
$B$7 X1 0 -300 200 300 1E+30
$B$8 X2 0 -450 300 450 1E+30
$B$9 X3 0 -1600 400 1600 1E+30
$B$10 X4 7.5 0 600 1E+30 360

Constraints

Shadow Price
Final Constraints Allowable Allowable
Cells Name (Lagrange
value RHS Increase Decrease
Multipliers)
$B$13 X1+2.5X2+3.4X3+1.8X4≤48 13.5 0 48 1E+30 34.5
$B$14 2X1+3X2+8X3+2.4X4≤18 18 250 18 46 18
$B$15 2X1+3.1X2+8X3+0.6X4≤36 4.5 0 36 1E+30 31.5

THE END

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