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1. Technique to analyse if the project is feasible or not. 2. It helps in recognizing needs and problems, and their early analysis 3. A tool for decision making 4. Identifying input, output parameters and criteria for evaluating systems. 5. Evaluating feasibility in terms of technical, financial and economic practicability. 6. Developing and implementation of system so designed in terms of - Engg. Calculations
UNIT - II PROJECT APPRAISAL
Specification of finalization Production, manufacturing Installation and commissioning
SALIENT ASPECTS OF PROJECT APPRAISAL
a. Need - New or improved b. Realisability - Cost/benefit terms c. Practicability - Technically, Financially economically viable. d. Optimality: Project to be best alternative e. Uncertainty : Probability of risk and cost of information to achieve greater certainty f. Controllability - Needs a feed back loop to review update and keep system on rough track.
It involved creating, identifying, brain storming feasibility of ideas and then selecting to prove further one or more feasible solutions. - Then prilimary design, optimal design (best alternatives) - Detailed design (a complete description of projects for its implimentation. - Lastly planning for production:
Preliminary Practical Analysis
Feasibility Study: A Schematic Diagram
Generation of Ideas Initial Screening Is the Idea Prima Facie Promising ?
Plan Feasibility Analysis
Conduct Market Analysis
Conduct Technical Analysis Basic and functional feasibliity
Conduct Financial Analysis Risk./ Return
Conduct Economic and Ecological Analysis Social & Political Realisability
Is the Project Worthwhile?
Prepare Funding Proposal
Including optimality and controllability
Key issues in Project Analysis Potential Market Market Analysis Market Share Technical Viability Technical Analysis Sensible Choices Risk Financial Analysis Return Benefits and Costs in Shadow Prices Economic Analysis Other Impacts Environmental Damage Ecological Analysis Restoration Measure
Feasibility Study has following sequence of events (Parts) Need Analysis: Define objectives of the projects. New or improves. Project Identification: Quantifies input, output, design parameters. a. Project Inputs: (i) Purposeful – Controllable - Uncontrollable Controllable: Man hours, Capital Inflow, Activity Analysis: Uncontrollable: Cost of Raw Material, Reliability of Technology, Availability of Power, Govt. & Political Interference.
(ii) Environment (Business) Interest, Insurance, Legal, Regulatory, Pollution. b. Project Output (i) Desired (ii) Undesired (i) Desired: Desired could involved physical quantities of products how much, how many, could also involve value judgment status, comfort, Aesthetic Appeal (Keeping user in view undesired) (ii) Undesired: Undesired Pollution, Waste material, Waste Energy, Danger (Bhopal Gas Tragedy, Nuclear Explosion). Discomfort to people living in vicinity. c. Design Parameters: Like features attributes that would affect behavior and performance. Most common are physical size, weight, etc. 8
d. Constraint Specification: on input, output, design parameters which could be essential to evaluate the alternative solutions. Measure of the values indicate range of acceptable values. e. Evaluation Criteria: Total revenue operating cost gross/ net profit, ROI/ EOI etc. 3. Practicability Analysis: Idea to eliminate the concepts that are not feasible. Are these operational finance-able, Economical, Physically realizable, Politically acceptable , Physically Realizable which alternatives needs the solutions within the specified parameters. Financial Realize-ability: (i) Will the money required come as per time frame.
(ii) Sources of Capital Inflow who where from: 4. Economic Practicality : (i) Even a financially feasible may not be economically practical. (ii) Economic Feasibility Study of alternative solutions by constraints operating cost, Maintenance and Spare part expenditure. (iii) Total revenue that would accrue over the operational life of systems, (i.e. what is the break even point or optimum point of economic operations of the project) We will consider those alternative solutions to be economically feasible that meet the specified rates of return on investment.
5. Social and Political Realize-ability : The project may be physically, Financially, Economically feasible, but may encounter social at political obstacles. Normally in case of large projects, there are additional considerations of health (Polio Campaign, Malaria, TB, CNG Buses) education (private and foreign universities) Welfare (METRO RAIL, Realignment over the range area, Civil Nuclear Technology).
Analysis of technical and engineering aspects is done continually when a project is being examined and formulated. a. To ensure that the project is technically feasible in the sense. b. To facilitate the most optimal formulation for the project in terms of technology, size, location, and so on. Manufacturing Process/ technology Technical arrangements Materials and inputs Product Mix Plant capacity Location an site Machineries and equipments
Structures and civil works Environmental aspects Project charts and layouts Project implementation schedule Need for considering alternatives 1. MANUFACTURING PROCESS/TECHNOLOGY
A. Choice of Technology The choice of technology is influenced by a variety of considerations:
Plant capacity Principal inputs Investment outlay and production cost Use by other units Product mix Latest developments Ease of absorption
B. Appropriateness of Technology Appropriate technology refers to those methods of production which are suitable to local economic, social, and cultural conditions. Technology should be evaluated in terms of the following questions:
Whether the technology utilizes local raw materials? Whether the technology utilises local man power? Whether the goods and services produced cater to the basic needs? Whether the technology protects ecological balance? Whether the technology is harmonious with social and cultural conditions?
2. Material Inputs and Utilities
Technical analysis is concerned with defining the materials and utilities required. Those concerned with location, technology and equipments. Material inputs and utilities maybe classified into four broad categories; (i) raw materials (ii) Processed industrial materials and components (iii) auxiliary materials and factory supplies, and (iv) utilities a). Raw Materials b). Processed Industrial Materials and Components c). Auxiliary Materials and Factory Supplies • A manufacturing project requires various auxiliary material and factory supplies like chemicals, additives, Packaging materials, paint, varnishes,
Oils, grease, cleaning materials, etc. The requirement of such auxiliary material and supplies should be taken into account in the feasibility study. d). Utilities (Power, water, steam, fuel, etc) A broad assessment of utilities (power, water, steam, fuel, etc) may be made at the time of the input study The following question should be raised while conducting the inputs study. What quantities are required? What are the sources of supply? What would be the potential availability? What are the likely shortages/ bottlenecks? What measures may be taken to augment supplies? 3. PRODUCT MIX Variations in size and quality are aimed at satisfying a broad range of customers.
While planning the production facilities for the firm, some flexibility with respect to the product mix must be sought. 4. PLANT CAPACITY (also referred to as production capacity) refers to the volume or number of units that can be manufactured during a given period. Technological requirement : Based upon industry; there is some minimum capacity of the Plant. Input Constraints: Power Supply, Raw Material Investment Cost: Investment cost per unit decreases as the capacity of the plant increases. Market Conditions: Depends upon demands supply and economy of the country. Resources of the firm: Both managerial and financial limitation.
Government Policy: Capacity level may be influenced by the policy of the government. 5. LOCATION AND SITE Location and site follows an assessment of demand, size and input requirement. Location refers to a fairly broad area like a city, an industrial zone, or a coastal Proximity to Raw Materials and Markets (refinery, Steel Plant, Commodity based). This generally implies that:I. A resource-based project like a cement plant or a steel mill should be located close to the source of the basic material (for example, limestone in the case of a cement plant and iron or in the case of steel plant. II. A project based on imported material may be
located near a port; and (iii) a Project manufacturing a perishable product should be close to the centre of consumption. Availability of Infrastructure Availability of power, transportation, water, and communications, should be carefully assessed before a location decision is made Labour Situation In labour – intensive projects, the labour situation in a particular location becomes important. The key factors to be considered in evaluating the labour situation are: • Availability of labour, skilled, semi – skilled and unskilled • Prevailing labour rates
• • •
Labour productivity State of industrial relations judged in terms of the frequency and severity of strikers and lockouts Degree of unionisation
Governmental Policies Private sector projects, location is influenced by certain governmental restrictions and inducements. Inducements for establishing industries in backward areas. These inducements consist of subsidies, confessional finance, sales tax loans, man power subsidy, income tax benefits, lower promoter contribution, and so on. Other Factors • Climatic conditions
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General living conditions Proximity to ancillary units Ease in coping with pollution
SITE SELECTION Two to three alternative sites must be considered and evaluated with respect to cost of land and cost of the site preparation and development. The cost of site preparation and development depends on the physical features of the site. MACHINERIES AND EQUIPMENT The requirement of machineries and equipment is dependent on production technology and plant capacity. The equipment required for the project may be classified into the following types:
(i) Plant (process) equipment, (ii) mechanical equipment (iii) electrical equipment (iv) instruments (v) controls (vi) internal transportation system, and (viii) others. CONSTRAINTS IN SELECTING MACHINERIES AND EQUIPMENT. - Limited availability of power to set up an electricity – intensive plant like, - Difficulty in transporting heavy equipment to a remote location. - Workers may not be able to operate PROCUREMENT OF PLANT AND MACHINERY The plant and machinery may be placed with different suppliers or a turnkey contract may be given for the entire plant and machinery to a single suppler. Desired quality of machinery, the level of
Technological sophistication, the relative reputation of the various suppliers, the expected delivery schedules, the preferred payment terms. STRUCTURES AND CIVIL WORKS Structures and civil works may be divided • Site Preparation and development • Buildings and structures, • Outdoor works ENVIRONMENTAL ASPECTS A project may cause environment pollution in various ways : it may throw gaseous emissions; it may produce liquid and solid discharges; • What are the types of effluents and emissions generated? • What needs to be done for proper disposal of effluents and treatment of emissions?
Will the project be able to secure all environmental clearances and comply with all statutory requirements? PROJECT CHARTS AND LAYOUTS • General Functional Layout • Material Flow Diagram • Production Line Diagrams • Transport Layout • Utility Consumption Layout • Communication Layout • Organizational Layout • Plant Layout SCHEDULE OF PROJECT IMPLEMENTATION As part of the technical analysis, a project implementation schedule is also usually prepared. For preparing the project implementation schedule the following information is required.
List of all possible activities from project planning to commencement of production • The sequence in which various activities have to be performed. • The time required for performing the various activities. • The resources normally required for performing the various activities. • The implications of putting more resources or less resources than are normally required. WORK SCHEDULE The work schedule, as its name suggests, reflects the plan of work concerning installation as well as initial operations. The purpose of the work schedule is:
• • •
To anticipate problems likely to arise during the installation phase and suggest possible means for coping with them. To establish the phasing of investments taking into account the availability of finances. To develop a plan of operations covering the initial period.
Environmental Appraisal A systems approach is a holistic approach to problem solving that involves formal considerations of the following parameters: 1. The total objectives of the project and, ore specifically, the performance measures of the whole project. 2. The project’s environment or the fixed constraints. 3. The resources or inputs to the projects. 4. The components of the project, their activities, goals, and measures of performance. 5. The management of the project, or the organization or various components and their interactions. The next aspect to consider in the system approach is the project’s environment.
This can be viewed as whatever lies ‘outside’ the project, but that which can affect and be affected by the operations of the project. In project parlance the environment means much more than just the weather. For example, for automobile environment, we can consider the roads and highways; petrol pumps and servicing stations, etc. need to be included in our definition of the automobile system. When we say that something lies ‘outside’ the project, and hence constitutes its environment, we mean that the project can do relatively little about its environment’s characteristics or behaviour. Identification of the environment depends on the answers to the following two questions. 1. Can I do anything about it?
2. Does it affect my situation or objectives’? If the answer to the first is ‘No’, and that do the second is ‘Yes’, then ‘it’ is the environment.
Characteristics of the Environment
The environment provide, ‘given’ or ‘fixed’ inputs to the project. It is also affected, directly or indirectly, by the outputs from the project; Hence, it has a ‘dynamic’ influence on the project or by the project. However, less attention is paid on environment because of two reasons (a) Firstly : The environment is ‘outside’ the project and hence of little direct interest to us.
(b). Secondly, by definition, the environment is something that we cannot control, and hence it is ‘fixed’. Of course we could consider the effects of the output of a project on its environment. (METRO – NO Pollution – Less Noise, Dev of Area) This is what is referred to as Environmental Impact Assessment (EIA), which would be a part of the feasibility study for most projects, especially for large industrial projects. (e.g. Refinery , Chemical plant, Nuclear plant)
One of the main preoccupations of management in any organization and in project organization is the allocation of scarce resources. These resources include manpower, materials, facilities, and financial resources. For every project being planned, the project manager must ask the following two questions: - Are the resources required for the given project available ? Is this the best use to which these resources can be put ? Most project are subjected to an evaluation before they are given the go-ahead. An essential part of his evaluation is the financial
appraisal. Traditionally, this has been aimed at deciding whether or not a project will be profitable and selecting the one project out of several competing projects that appears the most profitable. The project manager should understand the processes so that he can benefit from them. (Difference between private – public Social Benefit projects). It is with this intention that we present the various techniques of managerial evaluation, which consist of the technical, economic, financial, social and political appraisal and assessment of a project.
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