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Project Management and Finance

Unit-1I

A feasibility study is also known as a feasibility report or a feasibility analysis. The main reason
why you would create a feasibility study document is to check whether or not you should
commit your time and resources towards a project. A feasibility study may reveal new
challenges or concepts which may completely change the scope of a project. It’s better to make
such determinations beforehand instead of starting the project only to realize that it won’t work.
Simply put, conducting this study gives you a clearer picture of the project. A feasibility report
or a feasibility analysis shows the analysis and evaluation of a specific proposed system or
project. The study aims to determine whether or not the project is financially and technically
feasible.
To help you understand better, let’s have a feasibility study example.
• For instance, a hospital wants to expand by adding an extension to one of the buildings.
Before doing this, they should conduct a feasibility study to determine whether or not
they should go through with this expansion. Here are the steps to take:
• First, they must take into consideration the costs of materials and labor. They must also
think about the disruptions the project might cause to the patients and the staff.
• They must also gauge the opinion of the public about the project. To do this, they can
ask the local community if they’re against or in favor of the project.
• The next step is to start a conversation with the stakeholders and see how they respond
to the idea.
• Finally, they should come up with a list of all the project’s pros and cons. After that,
they weigh the points against each other.
• After all these steps, the team who conducts the feasibility study can determine whether
or not they should continue with the expansion.

Factors Considered for preparing the feasibility report

• Projects are an important part of organizations and businesses. While you want all of
your projects to succeed, this isn’t always the case. If you want to avoid starting projects
which have a high likelihood of failing, then you must first perform a feasibility study.
• After performing this study, you should come up with a feasibility report example to
help you make a final decision about your project.
1. Business alignment:When you’re trying to envision a new Product or Project, think about
whether it corresponds with the mission statement of your company or not. The project
must align with your business for it to be a viable one. It should support the best interests of
the organization which means that it will be highly beneficial too.
2. System and Technology Assessment:After brainstorming and coming up with the scope, it’s
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time to assess the system and technology viability of the project along with its deliverables.

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Project Management and Finance

In this step, the team must have senior technical consultants who will provide the needed
input.
3. Economic viability:It’s also important to examine the economic viability of the project .
This means having to come up with an estimate for the implementation costs, the ROI of
the project, the target market niche, and how saturated the market is.
4. Operational considerations:After establishing the scope and making a list of the requirements,
it’s time to determine whether or not the solution you came up with solves the issue. In some
cases, a proposed project may provide a tangential solution to the expectations of the target
market. In such a case, this doesn’t make the project fully viable. Legal ramifications You
must also check if the project comes with any legal ramifications. Make sure that there are
no concerns regarding local and foreign government regulations, company policies,
infringement issues, and so on. You must address these issues to make sure that you don’t
run into any roadblocks after implementation.
5. Resource and schedule concerns:This is one of the most important factors to consider. If you
don’t have enough resources, you can’t push through with the project. Also, if the project
might take too long, this would cause issues too.
A feasibility study is an important aspect of any project. Through it, you analyze whether or
not you should go through with the project given the current situation and the details of the
project itself. If you’re tasked to come up with a report or a feasibility study example, include
the following information:
▪ The scope of the project: You must clearly establish the scope of the project or the
issue you plan to address. Also, define the parts of your business which would get
affected by the project either indirectly or directly. Creating a well-defined scope allows
for the accuracy of your feasibility study.
▪ A current analysis: This is important for the evaluation of the current implementation.
Through this analysis, you can determine the weaknesses and strengths of the existing
approach to help save you a lot of time and money.
▪ The requirements of the project: It’s important to define all of the requirements
depending on your project’s objectives. This helps give you a better idea of the resources
you need and if you have enough.
▪ The project approach: You must decide on the recommended course of action or
solution to meet the requirements of the project. Think about different alternatives and
choose the most viable option.
▪ Evaluation: Here, you assess the cost-effectiveness of the approach you’ve chosen
along with an estimate of the project’s total cost. You may also estimate the costs of the
alternative options for the purpose of comparison.
▪ Review: After bringing together all of these elements into your feasibility study, it’s
time to conduct a formal review. Use this review to check how accurate your feasibility
study is. This, in turn, helps you make a final decision about the project.

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Project Management and Finance

Content of Feasibility Report

Feasibility analysis is quite technical. It’s an analysis of the details of a specific project.
It contains a lot of important information which helps the decision-makers of the
organization to come to a more informed decision about the project. Creating a
feasibility study example doesn’t have to be a difficult task as long as you know what
information to include. Include an executive summary at the beginning or end of your
report The key here is the word “summary.” Emphasize the most important points of
each of the sections.
▪ Create an outline : Abstract: Creating an outline makes the task easier for you. The
outline helps guide you as you’re writing the report. It also gives you an idea of what
you’ve finished and what you must still work on.
▪ Estimate and calculate the required materials and labor: Make a list of all the
materials you need for your project. Also, include other details like where you plan to
get the materials, whether you can get discounts for bulk purchases, the details about
the materials, and so on. You must also come up with a list of the labor requirements no
matter what the size of your project is. Most of the time, labor is one of the biggest
expenses you might have in your project.
▪ Shipping and transportation requirements : Think about how you will start
transporting the materials you need for your project. While small items aren’t a problem,
if you need to ship or transport equipment or other heavy items, you might have to hire
a trucking or a freight company.
▪ Include the marketing requirements too : Marketing is also an important part of your
project, especially if you want to reach out to a target audience. Think about the
marketing requirements you need and how you plan to produce them.
▪ Consider the technology requirements of your business : Depending on the nature
of your project, you may need some type of technology during implementation. Include
this component in your feasibility study and incorporate the details about it into your
report.
▪ Include the project’s target dates:especially for the investors and stakeholders of
your projects. Target dates give them a better idea of when your project will get
accomplished.
▪ Provide supporting documents for the financial information: Again, this
information is for the benefit of the project’s investors and stakeholders. But it’s also
important for you to have these documents, especially if you’re the one in charge of the
project’s finances.

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Planning Commission Feasibility Report should include the following

▪ Raw Material Survey
▪ Demand Survey
▪ Technical Study: Product Pattern, Process Selection, Plant Size, Raw material
requirements
▪ Location Study
▪ Project Capital cost estimate and source of finances
▪ Profitability and cash flow analysis
▪ Cost benefit analysis

Case Study 1: Feasibility Study for setting up a Bread Making Company

1. Market survey and capacity of the unit.
2. Study on raw material supplies.
3. Installation site.
4. Technical study.
5. Human potential.
6. Schedule for making the investment.
7. Economic and financial study.

Market Survey and Capacity of the Unit: Before starting up any activity, detailed research
is essential to gain a better knowledge of:
➢ The consumption habits and purchasing power (potential demand) of the company’s
target population (which product or products and for whom?).
➢ The situation as regards competition (what market share is the new company aiming
for? Are there expansion possibilities?).
The following points must be addressed by means of a questionnaire.
✓ Details of competition.
✓ Local units and capacities.
✓ Development of competitors over time.
✓ Possibility of creating a new unit.

By using the data collected during this research stage, it is possible to establish a production
programme which will determine the capacity of the unit.
✓ Market survey and capacity of the unit
✓ Market research - potential demand
✓ Projected sales and marketing
✓ Production programme
✓ Capacity of the unit
If the results of the first stage are positive and satisfactory, then you continue:
Study on Raw Material Supplies: A market survey on raw materials and consumables and the
energy required to run bakeries is set out below. The following questionnaire is useful for
carrying out a market survey on raw materials and consumables and the energy required to
operate a bakery.

Project Management and Finance

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QUESTIONNAIRE

1. Flours:· Is there satisfactory local production of flour? · Are flours

imported and where do they come from?
2. Other materials (yeast, salt, fat, improvers, etc.) :· Is it easy to
obtain these materials on the domestic market or do they have to
be imported?
3. Fuels : What fuels are available (electricity, oil, gas, wood, etc.)?

➢ Calculating the cost of

materials
✓ Cost of raw materials and
consumables.
✓
Transport
costs.
✓ Cost of other materials (energy,
water, etc.).
✓ Customs duties,
taxes, etc.
Installation site: The installation site plays an important role in the overall
operation of the company and in saving time and financial resources. For the choice
of site, the following questionnaire can allow the appropriate information to be
obtained:

QUESTIONNAIRE:

❖ Are there any State-imposed limitations concerning the site recommended for the
bakery?
❖ Are factors of production available on site (electricity, water, etc.)?
❖ The site in relation to the labour market.
❖ Are the road network and other means of transport efficient?
❖ What is the degree of security in the region?

Technical study: The equipment must be selected on the basis of relevant criteria. This
choice determines the surface area and location of the site for the bakery. The
market survey has identified the distribution circuits and, therefore, the nature and
number of the means of transport. Finally, the degree of security for people and
property in the region is an important parameter which must be borne in mind when
deciding on the site for a bakery.

▪ The technical study essentially

covers:
✓ The equipment.
✓ Electricity and water supplies.
✓ Buildings (purchase or rental) and installations.
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✓ Means of transport.
✓ Security measures.

Calculating the
investment costs:
▪ Cost of the equipment (FOB
price).
▪ Packaging and
transport costs.
▪ Customs duties,
taxes, etc.

Project Management and Finance

▪ Installation costs (technicians and specialists).

▪ Cost of purchasing a building or annual rent.
▪ Annual maintenance costs for plant and equipment.
▪ Stocks of materials and spare parts.
▪ Cost of security measures and systems.
The Human Potential: The size of the company and the type of equipment chosen determine the
number of staff required. The specialties as defined for bakeries are as follows:

· Foremen · Drivers · Office workers

· Bakers · Salesmen · Security guards
· Labourers · Mechanics · Manager
· Supervisors · Electricians
· Apprentices

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Calculation of personnel costs (annual)

· Wages
· Social security charges
· Bonuses

Schedule for making the Investment:This is a matter of establishing a precise timetable for
implementation of the different stages of the investment before the start-up of the unit.
These different stages
are:
❖ Preparing or fitting out the building (purchase - construction - rental).
❖ Delivery of equipment.
❖ Installation of equipment.
❖ Trial runs.

• Staff training.
1. Calculating the different costs
2. Expenditure required for start-up

Financing Arrangements: Capital costs are fixed, one-time expenses incurred on the purchase
of land, buildings, construction, and equipment used in the production of goods or in the
rendering of services. In other words, it is the total cost needed to bring a project to a
commercially operable status. Whether a particular cost is capital or not depend on many
factors such as accounting, tax laws, and materiality. Capital costs include expenses for tangible
goods such as the purchase of plants and machinery, as well as expenses for intangibles assets
such as trademarks and software development. Capital costs are not limited to the initial
construction of a factory or other business. Capital costs do not include labor costs (they
do include construction labor). Unlike operating costs, capital costs are one-time expenses
but payment may be spread out over many years in financial reports and tax returns. Capital
costs are fixed and are therefore independent of the level of output.

Project Management and Finance

Working Capital: Working capital, also known as Net Working Capital (NWC), is
the difference between a company’s current assets, such as cash, accounts receivable
(customers’ unpaid bills) and inventories of raw materials and finished goods, and
its current liabilities, such as accounts payable. Net operating working capital is a
measure of a company's liquidity and refers to the difference between operating current
assets and operating current liabilities. In many cases these calculations are the same and
are derived from company cash plus accounts receivable plus inventories, less accounts
payable and less accrued expenses.Working capital is a measure of a company's
liquidity, operational efficiency and its short-term financial health. If a company has
substantial positive working capital, then it should have the potential to invest and grow.
If a company's current assets do not exceed its current liabilities, then it may have
trouble growing or paying back creditors, or even go bankrupt.

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Operating Costs: Operating costs are expenses associated with the maintenance and
administration of a business on a day-to-day basis. The total operating cost for a
company includes the cost of goods sold, operating expenses as well as overhead
expenses. The operating cost is deducted from revenue to arrive at operating income
and is reflected on a company’s income statement.
Operating cost = Cost of goods sold + Operating
expenses
Sources of
Financing

Project Management and Finance

India Capital Market

Industrial Development
Government Financial
Securities Financial
Securities Intermediaries
Market Institutions

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New Issues Old Issues

Market Market

Private Bank
Commercial
Ot
hers Banks
Banks Public Bank
Ba Co-operative
nks Bank
Co
mpanies Co Regional Rural
panies banks

Foreign Bank

Financial Institutions Money Market

Financial Markets

Financial
Assets/Instruments

Financial Services

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Project Management and Finance

Preparation of Cost Estimate: Cost estimates are critical to successful project management,
so teams are expected to produce a reasonably accurate and reliable estimate during the
conception and definition phase of a project. Estimates are adjusted for accuracy during the
planning phase, as project stakeholders and sponsors may ask for revisions before they are
willing to authorize a budget. After this early stage, the accuracy of estimates is systematically
increased.

Cost estimating is an ongoing process, and estimate revisions are normal in order to ensure
accuracy throughout project execution. Typically, work scheduled in the near future will have
the most accurate estimates, while work scheduled farther away in time have less accurate
estimates. This approach is known as rolling wave planning.

Detailed cost estimates are usually broken down into greater levels of detail and supplementary
information. These outputs typically include:

Activity cost estimates for the activities that make up a project.

Supporting details, which include assumptions underlying estimates, cost data sources,
and cost element sensitivity.
Requested changes, which a newer, more accurate cost estimate may prompt.
Updates to the cost management plan, such as those necessitated by changes to the
project scope.
Inputs for subsequent planning processes that use cost estimates.

The estimate should include a breakdown of all costs involved in the project. There are two
main categories to classify costs:

Direct costs: Costs directly associated with the job (such as, labour, materials,
equipment)
Indirect costs: Costs incurred by the company as a part of doing business (such as,
utilities, office space, insurance)

Cost elements included in estimates will vary from business to business, but the most
common costs to consider for service businesses include:
Labour: The cost of human resources that are working on a project, both in terms of
salary and time
Materials & equipment: The cost of buying and maintaining any materials and
equipment required for a project
Facilities: The cost of using any working space that is not owned by the business
Vendors & sub-contractors: The cost of hiring third-party contractors to complete
work
Software: The cost of software programs
Hardware: The cost of physical computer programs
Risk/Contingency costs: Costs added to the estimate to address specific risks or
unforeseen additional costs to the project (such as admin, technical support, travel,
and client visits)
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The usefulness of a cost estimate depends on how well it performs in areas like reliability and
precision. There are several characteristics for judging cost estimate quality. These include:

Accuracy: A cost estimate is only as useful as it is accurate. Aside from selecting the most
accurate estimating techniques available, accuracy can be improved by revising estimates as
the project is detailed and by building allowances into the estimate for resource downtime,
project assessment and course correction, and contingencies.

Confidence level: Since even the best estimates contain some degree of uncertainty, it is
important to communicate the amount of potential variability in any estimate to stakeholders.
Confidence levels can communicate estimates as ranges, such as those produced by three-point
estimating techniques or Monte Carlo simulations.

Credibility: Stakeholders or sponsors preparing to authorize budgets want to know that

estimates are founded in established fact or in practical experience. Increase the credibility of
an estimate by incorporating expert judgment and by using set values for variables, such as unit
costs and work rates.

Documentation: Since project managers are eventually held accountable to cost estimates, it
is important that the assumptions underlying estimates are identified and recorded in writing,
and that regular budget statements are provided. Thorough documentation precludes
misunderstandings and helps stakeholders understand the reasons behind estimate revisions.

Precision: To reduce the variation in cost estimates due to techniques used, estimators should
compare and corroborate estimates. Cost estimating software makes this fairly easy.

Reliability: Reliability is a concept based on the extent to which historical cost estimates for a
certain type of project have been accurate. For new projects that are similar to successfully-
completed past projects, analogous estimating techniques will allow reliable estimates.

Risk detailing: All projects can be affected by negative risks, so it is important to build
allowances into cost estimates. Thorough risk identification and allocation of contingency
reserves is the most common approach. Estimates should be overestimated rather than
underestimated, and estimators should establish tolerance levels for cost deviation.

Uniformity: For performing organizations that conduct many projects of the same type, expect
unit costs to be reasonably consistent across projects and only adjusted for inflation. This type
of unit cost uniformity is possible for organizations that have undertaken several similar
projects, which enables them to create reference lists for recommended unit costs.

Validity: Confirming the validity of a cost estimate involves checking the underlying data for
accuracy. Improve validity by relying on established cost literature, and on cost indices when
up-to-date literature is unavailable.

Verification: Cost verification is the act of checking that mathematical operations used in an
estimate were performed correctly. Cost verification is much easier if estimates are properly
documented.
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Project cost estimates are classified into categories based on how well the scope is defined at
the time of estimation, on the types of estimation techniques used, and on the general accuracy
of estimates. These categories are not standardized, but they are all based on the recognition
that a cost estimate can only be as accurate as the project scope is detailed.

Types of Estimate

Order of magnitude estimates: An order of magnitude estimate, or ASPE Class 5, is an

extremely rough cost estimate created before a project has been defined. It is based only on
expert judgment and the costs of similar past projects. An order of magnitude estimate is
typically presented as a range of costs spanning -25% to +75% of the actual project cost. It is
only used in high-level decision making to screen projects and determine which ones are
financially feasible.

Intermediate estimates: An intermediate estimate can be created using stochastic or

parametric techniques when a project is defined to some limited extent. Like an order of
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magnitude estimate, its main purpose is determining project feasibility based on the general
project concept.

Preliminary estimates: Created when a project’s deliverables are about halfway defined, a
preliminary estimate uses somewhat detailed scope information to incorporate unit costs.
Preliminary estimates are accurate enough to be used as a basis for project financing. Some
project budgets are authorized based on the preliminary estimate.

Substantive estimates: A substantive estimate uses a reasonably finalized project design to

create a fairly accurate cost estimate based mainly on unit costs. At this point, the project’s
objectives and deliverables are established, so a substantive estimate is accurate enough to
create a bid or tender to complete a project. Substantive estimates may also be used to control
project expenditure.

Definitive estimates: Drafted when a project’s scope and constituent tasks are almost fully
defined, a definitive estimate makes full use of deterministic estimating techniques, such as
bottom-up estimating. Definitive estimates are the most accurate and reliable and are used to
create bids, tenders, and cost baselines.

Of course, even definitive estimates do not remain static through project execution. Since all
estimates are based on numerous assumptions and are contingent upon risks of all magnitudes,
cost estimates are often updated if these base assumptions change significantly or additional
risks are realized. When this happens, the project cost baseline is revised accordingly so that
you can continue to assess project performance accurately. Estimates of all types are created
using a combination of estimation techniques (with varying levels of accuracy).

CAT Vs RAT
RATs are a way of assessing how our current capability set helps us in pursuing the strategy
framed by our decision process. In order to assess our current capability set, we need to classify
it by determining how it is:
Relevant. Our capability set is highly relevant if we are outstanding in one or more key
competences required to execute the strategy. Our capability set is irrelevant if we do not fare
well in at least one required competence;
Appropriable. Our capability set is highly appropriable if our competences are remarkably
unique and very difficult to match. This gives us an ability to outperform competition or
traverse rough spots during strategy execution. Our capability set is not appropriable if we are
not able to differentiate ourselves from the competition or if they are easily replicated;
Transferable. Our capability set is highly transferable if we control the required landscape
and resources to deliver our competences. This allows us to capture the value created and
delivered. Our competency set is not transferable if we are dependent on others to exercise our
competencies.
CATs are a similar way of assessing how our capability set changes as a result of executing the
strategy framed by our decision.
Complementary. The resulting capability set is highly complementary if we can create or
develop competencies that enhance or extend our existing capabilities. This allows us to
improve our performance, address other relevant markets and approach more challenging
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strategies, namely by having a better RAT in the future. The resulting capability set is not
complementary if we’re not able to create other competencies or if the acquired competencies
stray too far from our core goal;
Appropriable. If the newly acquired capabilities are extremely difficult to replicate or are
based in competencies which are difficult to obtain, the capability set is highly appropriable.
Conversely, if the new competencies are not differentiated or are easily acquirable, the
competency set is not appropriable;
Transferable. If new competencies are usable, controlled and applicable using only resources
or additional competencies that are controlled by us, then the new competency set is highly
transferable. Otherwise, the new competency set is poorly transferable.
Evaluation of Project Profitability
• Pay Back Period
• Return of Investment
• Net Present Value
• Internal Rate of Return
• Benefit Cost Ratio.

The payback period is the time required to recover the initial cost of an investment. It is the
number of years it would take to get back the initial investment made for a project. Therefore,
as a technique of capital budgeting, the payback period will be used to compare projects and
derive the number of years it takes to get back the initial investment. The project with the least
number of years usually is selected.
The initial investment in both projects is Rs. 10,00,000.
– Project A has an even inflow of Rs. 1,00,000 every year.
– Project B has uneven cash flows as follows:
->Year 1 – Rs. 2,00,000
-> Year 2 – Rs. 3,00,000
-> Year 3 – Rs. 4,00,000
-> Year 4 – Rs. 1,00,000
Now let us apply the payback period method to both projects.

Project A: The formula of payback period when there are even cash flows is:

Payback period= Initial investment/Net annual cash inflows

If we use the formula, Initial investment / Net annual cash inflows

then the payback period computes to –10,00,000/ 1,00,000 = 10 years
Project B:
Total inflows = 10,00,000 (2,00,000+ 3,00,000+ 4,00,000+ 1,00,000)
Total outflows = 10,00,000
The formula to calculate the payback period for uneven cash flows is:
Considering the year of recovery as ‘n’.
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Return on investment (ROI) is a performance measure used to evaluate the efficiency

or profitability of an investment or compare the efficiency of a number of different
investments. ROI tries to directly measure the amount of return on a particular investment,
relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is
divided by the cost of the investment. The result is expressed as a percentage or a ratio.

The return on investment (ROI) formula is as follows:

ROI= Current Value of Investment−Cost of Investment/Cost of Investment

Net Present Value: Net present value (NPV) is the difference between the present value of
cash inflows and the present value of cash outflows over a period of time. NPV is used
in capital budgeting and investment planning to analyze the profitability of a projected
investment or project.NPV is the result of calculations used to find today’s value of a future
stream of payments. It accounts for the time value of money and can be used to compare similar
investment alternatives. The NPV relies on a discount rate that may be derived from the cost
of the capital required to make the investment, and any project or investment with a negative
NPV should be avoided. An important drawback of using an NPV analysis is that it makes
assumptions about future events that may not be reliable.

Fixing Zero date: Zero Date of a Project means a date is fixed from which implementation
of the project begins. It is a starting point of incurring cost. The project completion period is
counted from the zero date. Pre-project activities should be completed before zero date. The
pre-project activities should be completed before zero date.
The pre-project activities are:
(a) Identification of project/product
(b) Determination of plant capacity
(c) Selection of technical help/collaboration
(d) Selection of site.
(e) Selection of survey of soil/plot etc.
(f) Manpower planning and recruiting key personnel
(g) Cost and finance scheduling.