Project Management Lecture Note

UNIT 4: PROJECT PREPARATION/FEASIBILITY STUDY

A feasibility study is an in depth investigation of the factors that affect the future success of a
project or the process of project preparation and analysis.
Feasibility study provides relevant information for the final investment decision (accept or reject)
based on a thorough and comprehensive analysis of the project technical, financial, economic,
social and institutional aspects.
Feasibility study covers the following areas of study:
1. Market and Demand Analysis
2. Raw Materials and Supplies Study
3. Location, site and Environmental Impact Assessment (EIA)
4. Production Program and Plant Capacity
5. Technology Selection
6. Organizational and Human Resource
7. Financial and Economic Analysis
4.1. Markets and Demand Analysis
In most circumstances, the first step in project analysis is to estimate the potential size of the
market for the product proposed to be manufactured (or service planned to be offered) and get an
idea about the market share that is likely to be captured. The task demands an in – depth study
and analysis of various factors such as:
o existing pattern of consumption and growth,
o consumption of the market,
o nature of competition,
o income levels of the society,
o availability of substitutes,
o system of distribution channels, etc.
The objectives of market and demand analysis in preparing a project are to:
◊ Identify potential consumers or buyers.
◊ Gathering secondary and/or primary data/ information
◊ Market survey
◊ Market classification/characterization of the market demand forecasting
◊ Uncertainties in demand forecasting
◊ Market planning
4.2. Raw Materials and Supplies Study
An important aspect of technical analysis is concerned with defining the materials and utilities
required; specifying their properties in is some detail, and setting up their supply program me.
There is technical relationship between input and output; the amount of input determines the
amount of output. The raw materials and supplies study consists of thorough analysis on:
◊ What type of input?
◊ Where to find the inputs?
◊ How much it costs?
Material inputs and utilities may be classified into four broad categories:
i. Raw materials(unprocessed and Semi-processed)

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ii. Processed industrial materials and components

iii. Auxiliary materials and factory supplies(such as electricity, fuel, water & recycled waste),
and
iv. Utilities.
4.3. Location, Site and Environment Impact Assessment (EIA)
4.3.1. Location and Site
The choice of location and site necessitates an assessment of demand, size, and input
requirement. Although most often the terms ‘location’ and ‘site‘ are used synonymously, they
should be distinguished. Location refers to a relatively broad area like a city, an industrial zone,
or a costal area; site refers to a specific piece of land where the project would be set up.
The locational requirements and conditions that are significant for the selection of both location
and site should be judged against the defined corporate strategies and the financial and economic
impacts.
a. Choice of Location
In a feasibility study, a good starting – point for the final selection of a suitable location is the
location of raw materials and factory supplies, or if the project is market oriented – the location
of the principal consumption centers in relation to the plant.
Generally, the choice of location is influenced by a variety of considerations such as:
◊ Project itself
◊ proximity to raw materials and markets,
◊ availability of infrastructure,
◊ labor situation,
◊ governmental policies, and
◊ other factors like climatic conditions, general living conditions, proximity to ancillary units,
ease in coping with pollution / controlling pollution.
Location wise projects can be categorized in three forms i.e.
i. Rooted Projects - Proximity to an Input
ii. Tied Projects - Proximity to the Market
iii. Foot Loose Projects - Projects that can be located anywhere.
b. Site Selection
After the completion of final locational selection, a specific project site and, if available, site
alternatives should be defined in the feasibility study. This will require an evaluation of the
characteristics of each site. The structure of site analysis is basically the same as for location
analysis and the key requirements, identified for the project, may give guidance also for site
selection. For sites available within the selected area, the following requirements and conditions
are to be assessed:
 Ecological conditions on site (soil, site hazards, climate etc.)
 Environmental impacts (restrictions, standards, guidelines)
 Socio – economic conditions (restrictions, incentive, requirements)
 Local infrastructure at site location (existing industrial infrastructure, economic and
social infrastructure, availability of critical project inputs such as labour and factory
supplies)

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 Strategic aspects (corporate strategies regarding possible future extension, supply and
marketing policies)
 Cost of land
 Site preparations and development, requirements and costs
√ The cost of land tends to differ from one site to another in the same broad location. Sites
close to a city cost more whereas sites away from the city cost less.
4.3.2. Environment Impact Assessment (EIA)
Environmental impact assessment is part of the project planning process. Practically it is an
integral part of feasibility analysis. Environmental benefits or costs of a project are usually
externalities or side effects that affect the society wholly or partially. In a broader socio –
economic evaluation of the feasibility of a project, environmental effects on the quality of life are
considered along with other factors to determine if the overall effect of the project is positive, or
to determine what modifications may be necessary to achieve a positive evaluation.
In principle, environmental impacts should be assessed on the basis of legal regulations and
emission standards and guidelines established in the country where the project is located.
Whereas, in countries, where no or only vague regulations and standards are defined, it may be
advisable to anticipate a future serious environmental control measures, especially in the case of
long – term projects.
Generally, externalities or side effects may bound to create environmental conflicts that might
ultimately lead to compensation claims, substantial costs for purification and equipment, and
possibly to the extent of the closure of the plant.
The general objective of environmental impact assessment in project analysis is to ensure
whether the development projects are environmentally sound. This implies that the effects of the
project over its estimated life do not unacceptably degrade the environment, and that no residual
effects are anticipated that would contribute to long – term environmental deterioration. It is
well known that the immediate and long – term health and welfare of people are linked to their
natural, cultural and socio – economic environment. Because of this reason, and to promote the
objective of incorporating the ideas and aspirations of the affected population in the decision
process, right from the earliest stages and throughout the project development cycle, public
participation is desirable.
The specific objectives of environmental impact assessment are as follows:
√ To promote a comprehensive, interdisciplinary investigation of environmental consequences
of the project and its alternatives for the affected natural and cultural human habitat.
√ To develop an understanding of the scope and magnitude of incremental environmental
impacts (with and without the project) of the proposed project for each of the alternative
project designs.
√ To incorporate in the designs any existing regulatory requirements.
√ To identify measures for mitigation of adverse environmental impacts and for possible
enhancement of beneficial impacts.
√ To identify critical environmental problems requiring further investigation.

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√ To assess environmental impacts qualitatively and quantitatively, as required, for the

purpose of determining the overall environmental merit of each alternative.

4.4. Production Program and Plant Capacity

The production program and plant capacity study involves in:
1. Determination of production program
It implies how you intend to produce the selected products? There are often four factors to
determine production programs; namely:
◊ Market requirement and marketing concepts
◊ Input requirement
◊ Technology
◊ Timeframe
2. Determination of Plant Capacity
The term production capacity can be defined as the volume or number of units that can be
produced during a given period. Plant capacity may be seen from two perspectives:
a. Feasibility normal capacity (FNC) and
b. Nominal maximum capacity (NMC).
a. Feasibility normal capacity (FNC) refers to capacity achievable under normal working
conditions, taking into account not only the installed equipment and technical conditions of
the plant, such as normal stoppages, down time, holidays, maintenance, tool changes, desired
shift patterns and indivisibilities of major machines to be combined, but also the management
system applied. Hence, the feasible normal capacity is the number of units produced during
one year under the above conditions.
b. Nominal Maximum Capacity (NMC) is the technically feasible capacity, which frequently
corresponds to the installed capacity as guaranteed by the supplier of the plant. A higher
capacity – nominal maximum capacity – may be achieved, but this would entail overtime,
excessive consumption of factory supplies, utilities, spare parts and wear – and tear parts, as
well as disproportionate production cost increases.
4.5. Technology Selection
Selection of appropriate technology and know–how is a critical element in any feasibility study.
Such selection should be based on a detailed consideration and evaluation of technological
alternatives and the selection of the most suitable alternative in relation to the project to
investment strategy chosen and to socio – economic and ecological considerations. Appropriate
technology choice is directly related to the conditions of application in particular situations.
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. Perhaps, only a certain production technology may be viable so as to meet a
given capacity requirement.
2. Principal Inputs: The chosen technology, in some cases, may be influenced by the raw
materials available – for instance, the quality of limestone determines whether the wet or dry
process should be used for a cement plant.

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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.
4. Use by Other Units: The technology adopted must be proven by successful use by other
units.
5. Product Mix: The chosen technology must be judged in terms of the total product – mix
generated by it, including saleable by – products.
6. Latest Developments: The technology adopted must be based on the latest developments in
order to ensure that the likelihood of technological obsolescence in the near future, at least, is
minimized.
7. Ease of Absorption: The ease with which a particular technology can be absorbed can
influence the choice of technology.
4.6. Organizational and Human Resource Study
A. Organizational study
Organizational study deals with the development and design of the organization needed to
manage and control the entire operations of an organization (establishment).
Steps in designing the organizational structure are:
1. State goals/ objectives of the organization
2. Identify the necessary functions to achieve the goal
3. Group the functions which are related and that could be performed by a responsible individual
4. Design the structure taking into account the level and span of control
5. Analyze and describe the key jobs (put the job description)
6. Work out qualification requirement and prepare recruiting and training program for staffing.
B. Human Resources (Manpower) Requirement:
In project where there is labor–intensive, the labor situation becomes important. The human
resources needed for the implementation and operational stages can be classified as skilled and
unskilled management, supervisory or workforce.
◊ Recruitment and Training of Human Resources – employment, economic development,
recruitment methods and policies, the means of retaining key personnel and the possible
fringe benefits to employees if any.
◊ Cost Estimates for Human Resources Requirement – salary and wages, fringe benefits,
overhead costs (these include factory supplies, maintenance costs, office supplies, utilities,
communication and rent expense, insurance and taxes etc) and recruitment/training costs.
4.7. Financial Analysis
Financial analysis is analytical work required to identify the critical variables which are useful
for likely to determine the success or failure of an investment. Its concern is to determine,
analyze and interpret all the financial consequences of an investment that might be relevant to
and significant for the investment and financing decisions.
Financial analysis is essentially undertaken for the following purposes:
1. It provides an adequate financing plan for the proposed investment
2. It determines the profitability of a project
3. It assists in planning the operation and control of the project by providing management
information to both internal and external users

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4. It advises on methods of improving the financial viability of a project entity.

To judge a project from the financial point of view, information about the following issue is
needed:
1. Initial Investment Cost
2. Production Cost
3. Marketing Cost
4. Projection of Cash Flow
5. Financial Evaluation
i. Payback Period (PBP)
ii. Accounting Rate of Return (ARR)
iii. Net Present Value (NPV)
iv. Internal Rate of Return (IRR)
v. Benefit Cost Ratio (BCR)
vi. Break – Even Analysis (BEA)
4.7.1. Initial Investment Cost/ Cost of a project
Initial Investment Cost represents the total cost of all items of outlay associated with a project are
called Project costs that are supported by long-term funds (financing). It covers capital expenditure
items such as land, buildings, equipment and furniture etc. It includes three groups of costs:
a. Initial fixed investment costs. This includes investment made for
o the acquisition of land,
o development of land for construction purpose,
o civil works (laying the foundation),
o equipment and machinery costs,
o installation of the machines or the plant, vehicle, furniture, building etc.
All these above costs are subject to depreciation except land which is depleted over time.
b. Pre-production capital expenditure. The pre-production capital expenditure includes:
- Research and development
- Pre-feasibility or feasibility study cost
- Training costs incurred before the commencement of the operation
- Recruitment of personnel costs
- Arrangement for marketing of the product such as early advertisement to inform the
public in advance before the actual distribution of the product to the market
- Arrangements for supplies etc.
c. Working capital. Working capital is simply a revolving fund. It is the difference between
current asset and current liability. This is known as a circulating fund because at the end of
the project's life it can be put as a benefit of the project. Defining the working capital
requirement appropriately is important because many projects fail while they are in operation
due to shortage of cash or working capital. The amount of the total working capital required
depends upon the operating costs for the project.
Table 1: Project Investment Costs ('000 Birr)
Item Project Year
1 2 3 4 5 N
Land preparation X X X X X
Building X X X X X

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Equipment X X X X X
Vehicles X X X X X
Working Capital X X X X X
Other costs X X X X X
Total XX XX XX XX XX XX
4.7.2. Production Cost/ Operating costs
Operating costs can be divided into two:
1. Fixed costs- fixed costs will include maintenance, administration and managerial charges,
etc. which will be relatively fixed with respect to the volume of production.
2. Variable costs - Variable working capital includes items such as materials, power, labor
inputs required for manufacture which will vary directly with the volume of production.
o The total operating costs will then be the sum of the fixed and variable costs and will
increase over the operating years until full utilization of the investment asset is reached.
Table 2. Project Operating Costs Schedule
Years
No Items 1 2 3 4 5 N
Capacity Utilization Rate (%) 50% 75% 80% 85% 90% 100%
1 Raw material
2 Labor
3 Utilities
4 Repair
5 Maintenance and Repair
6 Factory Overhead
Factory Costs (1-6) (a) XX XX XX XX XX
7 Administrative costs
8 Sales costs
9 Distribution cost
Operating Costs (7-9) (b) XX XX XX XX XX
10 Depreciation (c)
11 Interest expenses (d)
Total production
Cost (a + b + c + d) (Bold) XX XX XX XX XX

Note: n represents the number of periods covered in the project appraisal.

As it is shown in the above schedule, operating cost includes: cost of production/cost of sales,
administrative expenses, selling expenses, depreciation on fixed assets, and write off of
preliminary and preoperative expenses.
a. Cost of Production
The cost of production includes
- Material cost
- Wages including salaries for executives
- Utilities

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- Repairs and maintenance

- Factory over heads. These items include expenses for the factory as:
√ rent, for factory, if any
√ insurance premium for factory assets and factory workers
√ postage, telephone, fax, e-mail, etc, in the factory
√ traveling expenses
√ depreciation of plant and machinery and other factory equipment;
√ Proportionate management expenses, which may be charged to factory on the basis
of time spent by management on the project operation.
b. Administrative Expenses
This represents all indirect expenses incurred in the organization including estimates for
 salaries of all indirect staff
 traveling expenses
 insurance other than for the factory assets
 rent, rates, taxes, electricity etc and
 depreciations of all fixed assets other than factory assets other than factory fixed assets
c. Selling Expenses
This represents estimated expenses in sales divisions as per projected organizations and includes
the items:
- salaries and personnel cost for sales staff and managers as planned
- publicity, advertisement, exhibitions, etc.
- subsidies, commissions, discounts to dealers, etc.
- administrative expenses of sales office including rent.
d. Depreciation
Depreciation expenses represent consumption of utility units contained in an asset. It relates to
the cost center where such assets are installed.
4.7.3. Marketing Cost
Marketing Cost arises from the marketing strategy, such as packaging, storage, salaries,
commissions, discounts, promotion and advertisement, transportation, insurance, Distribution,
supplies and market research.

4.7.4. Projection of Cash Flow

Cash insufficiency can negatively affect the activities of a project. Even, it can lead to an
extinction of the project. Therefore, the project planner has to develop some techniques of
forecasting cash receipts and payments. Such a technique is called cash flow statement.
The principal elements of cash flow statements are:
1. Total Receipts from sales and other sources (cash, debtors, etc.)
2. Payments (to stock supplies, wages & salaries, equipment, etc.)
3. Net inflow or outflow
4. Add: cash at the beginning (at the start of the month)
5. Equals cash at the end of the month (ending cash balance).

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An example of a typical cash flow statement is given below:

Cash Flow Statement for Financial Planning ('000)
Years
No Items 1 2 3 4 5 6 n
1 Cash in flows
2 Financial sources:
3 Loans
4 Equity
5 Bank over draft
6 Supplies
7 Credit
8 Total in flow (2 + 3 + 4 + 5 + 6) XX XX XX XX XX
9 Cash out flows:
10 Operating costs (fixed and variable)
11 Debt service (Interest plus loan
repayment)
12 Corporate tax
13 Total assets
14 Dividend
15 Working capital (physical and
financial)
16 Surplus or deficit (Net cash flow)
(7 – 14)
17 Cumulative cash balance
(151 + 152 + 153 etc)

4.7.5. Financial Evaluation

Measures of project worth are measures that tell you whether a project is worth undertaking form
a particular viewpoint. All such measures are concerned with the question "are the benefits
greater than the costs?" There are different ways of measuring project worth, which may fall
under the following methods.
4.7.5.1. Payback Period (PBP)
Payback period is one of the simplest methods to find out the period by which the investment on
the project may be recovered from the net cash inflows, i.e., gross cash inflow less the cash
outflows. In short it is defined as the period required recovering the original investment cost.

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A. Payback period (PBP)

The Payback period is the length of time required for an investment to pay itself out.
It is computed as;
PBP = I/E = __________Initial Investment_______________________
Projected Net Cash Flow per year from the Investment
 When the projected net cash flows (E) are uniform
Examle: If ETB 4 million is invested with the aim of earning ETB500 000 per year (net cash
earnings), the payback period is:
P = ETB 4 000 000 = 8 years
ETB 500 000
Or

 When the projected net cash flows are non-uniform.

Where
I = the initial investment.
E = the projected net cash flows per year from the investment.
PBP = Pay Back Period expressed in number of years.
4.7.5.2. Accounting Rate of Return (ARR)
It basically expresses the average net profits (Net Cash Flows) generated each year by an investment
as a percentage of investment over the investments expected life. It is as
Y
ARR =
I
Where, Y = the average annual net profit (after allowing depreciation) from the investment
I = the initial investment
The calculated SRR should be compared with the investor’s Required Rate of Return (RRR) to
judge the profitability of the investment. The investment will be accepted if ARR >= RRR,
otherwise it will be rejected. When the ARR of all the investment opportunities is greater than
the RRR of the investor, then the investment yielding the highest ARR should be selected.
Example: Average Annual Net Profit = 1,000,000
Initial investment = 3,500,000
RRR = 22%
4.7.5.3. Net Present Value (NPV)
NPV is a standard method for using the time value of money to appraise long-term projects. NPV
can be described as the “difference amount” between the sums of discounted cash inflows and cash
outflows. It compares the present value of money today to the present value of money in the future,
taking inflation and returns into account.
Steps to find out the NPV
1. Find the project costs
2. Find the future cash flows as estimated for the projected business, net of cash outflows

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3. Select an appropriate rate and a period to be considered for such evaluation to find the
present value of the future cash flows for the period by discounting by the selected rate
4. Find out the difference between the present value of cash inflows (net) and the investment
cost (present value of investments over the life of the project).This difference represents
NPV. Where:
This calculation can be represented algebraically as: CF = Cash inflows at different periods
CF t
∑ (1+r )t −C0 r = discounting rate
NPV =
C0 = cash outflow in the beginning

The decision rule here is to accept a project if the NPV is positive and reject it if it is negative. A
project that NPV approaching zero is a marginal project, the planner has to re-modify, otherwise it
will be very risk to take such projects.
If… It means… Then…
NPV>0 The investment would add value to the The project may be accepted
firm
NPV<0 The investment would subtract value from The project should be rejected
the firm
NPV=0 The investment would neither gain nor We should be indifferent in the decision whether
lose value to accept or reject the project. This project adds
for the firm no monetary value. Decision should be based on
other criteria (e.g, strategic positioning or other
factors not explicitly included in the calculation).
Table. Net Present Value
4.7.5.4. Internal Rate of Return (IRR)
4.7.5.5. Benefit Cost Ratio (BCR)
Cost Benefit Analysis (CBA) is used for determining the attractiveness of a proposed
investment in terms of the welfare of society as a whole.
By presenting social benefits and costs in a monetary format, CBA not only facilitates choices
between alternative investment options but also gives an idea of the project worth. The
technique is principally used with regard to public sector investments.
CBA differs from financial appraisal which views an investment solely from the perspective
of individual participants, focusing on private benefits and costs and using market prices. In
contrast, CBA adopts a much broader approach, considering both monetary and non-monetary
benefits and costs, and uses prices that more accurately reflect economic, environmental and
social values.
This is a measure of efficiency and used for comparison of different projects. It is given by the
formula:
BCA = Benefits
Cost of the project

4.7.5.6. Break – Even Analysis (BEA)

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UNIT 5: PROJECT IMPLEMENTATION, MONITORING AND EVLAUATION

5.1. Project Planning
Planning is the systematic arrangement of tasks to accomplish an objective. The plan lays out what
needs to be accomplished and how it is to be accomplished. The plan becomes a benchmark against
which actual progress can be compared; then, if deviations occur, corrective action can be taken.
project objective
The first step in the planning process is to define the project objective—the expected result or end
product. The objective must be clearly defined and agreed upon by the customer and the organization or
contractor that will perform the project. The objective must be clear, attainable, specific, and measurable.
Achievement of the project objective must be easily recognizable by both the customer and the
contractor. The objective is the target—the tangible end product that the project team must deliver.
For a project, the objective is usually defined in terms of scope, schedule, and cost—it requires
completing the work within budget by a certain time.
5.2. Project Organization
5.2.1. Line and Staff Organization
5.2.2. Divisional Organization
5.2.3. Matrix Organization
5.3. Project Directing
5.4. Project Control (Monitoring and Evaluation)
5.5. Human Aspects of Project Management
5.6. Pre – requisites for Successful Project Implementations

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