INFOLINK COLLEGE

Project Analysis & Management

Instructor: Ashenafi N.

1
 Chapter One

GENERAL INTRODUCTION
2
 GENERAL
3
INTRODUCTION
OBJECTIVE

After studying this chapter, you should be able to:

 Define
project and project
Management
S

 State the features of a project

LEARNIN

 Differentiate Projects and Plans

G
What is a
Project?
4

 In order to understand project management, it is essential to first

define the term project. In fact, there is no universally accepted
definition for the word project that can serve for all situations.

 In this chapter, however, a project is defined as

 “… a temporary endeavor involving a connected

sequence of activities and a range of resources, which is
designed to achieve a specific and unique outcome,
which operates within time, cost and quality constraints
and which is often used to introduce change (Lake).
Conti
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5

 Turner defines a project as “…. An endeavor in which human,

(or machine) material and financial resources are organized in
a novel way, to undertake a unique scope of work, of given
specification, within constraints of cost and time, so as to deliver
beneficial change defined by qualitative and quantitative
objects.
Conti
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6
Conti
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 Accordingto Kerzner, a project can be considered

to be any series of activities and tasks that:

 Have a specific objective to be completed within

certain specifications
 Have defined start and end dates
 Have funding limits (if applicable)
 Consume human and non-human resources (i.e.,
money, people, equipment)
 Are multifunctional (i.e., cut across several functional lines)
Conti
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8

 Successful project management can then be defined

as having achieved the project objectives:

 Within time
 Within cost
 At the desired performance/technology level/
 While utilizing the assigned resources effectively
efficiently and
 Accepted by the customer
Conti
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 According to Maylor Harvey, a project can be defined as a non-

repetitive activity. This needs to be augmented by other
characteristics:

 It is goal oriented.
 It is being pursued with a practical end or goal in mind.

 It hasa practical set of constraints-usually centered

around time and resource
 The output of the project is measurable

 Something has been changed through the project being

carried out
Conti
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10

 The purpose of a project is to meet the stakeholders’ needs

and expectations.

 It is therefore a fundamental requirement for the project

manager to establish

 Who are the stakeholders and analyze their needs

expectations to define, at the outset, the project’s scope of
work and objectives.
Features of a project
11

 A project is a sequence of unique, complex, and connected

activities having one goal or purpose and that must be
completed by a specific time, within budget, and according to
specification.

 Sequence of activities: A project comprises a number of activities

that must be completed in some specified order, or sequence.

 Unique activities: The activities in a project must be unique. A

project has never happened before, and it will never happen
again under the same conditions.
Conti
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 Complex activities: The activities that make up the project are

not simple, repetitive acts, such as painting the house, washing
the car, or loading the delivery truck. They are complex. For
example, designing an intuitive user interface to an application
system is a complex activity.

 Connected Activities: Connectedness implies that there is a

logical or technical relationship between pairs of activities.
There is an order to the sequence in which the activities that
make up the project must be completed. They are considered
connected because the output from one activity is the input to
another.
Conti
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13

 One goal: Projects must have a single goal. Very large or

complex projects may be divided into several subprojects, each
of which is a project in its own right. This division makes for
better management control.

 Specified Time: Projects have a specified completion date. This

date can be self-imposed by management or externally specified
by a customer or government agency. The deadline is beyond
the control of anyone working on the project. The project is
over whether or not the project work has been completed.
Conti
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 Within Budget: Projects also have resource limits, such as a

limited amount of people, money, or machines that are
dedicated to the project. Senior management can change the
number of resources, but that luxury is not available to the
project manager.

 According to Specification: The customer, or the recipient of the

project's deliverables, expects a certain level of functionality
and quality from the project. These expectations can be self-
imposed, such as the specification of the project completion
date, or customer-specified, such as producing the sales report
on a weekly basis.
Project Parameters
22

 During a project's life, management focuses on three basic

parameters: quality, cost, and time. Traditionally, it is said that
a successfully managed project is the one that is completed at
the specified level of quality, on or before the deadline, and
within the budget.

 Depicted in the next power point is the interrelationship among

the traditional parameters measuring project success.
Conti
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Project Vs. Program
25

 A project is normally originatedfrom a plan which

can be a national plan or corporate plan.

 In many cases the term project is used for what should be

termed as program or work package.

 Some people use the term ‘project’ and ‘program’

interchangeably. However, there is a quite difference between
the two.
Conti
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 Program in general is a groups of related projects that are

managed in a coordinated ways to achieve certain objective.
Any development plan can be considered as a program

 A program is thus,

 larger in scope,
 activity oriented
 not necessarily time bound and
 its objectives are broader
Conti
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27

 Example,
 The national goal: Poverty Eradication
 Strategy: Increase productivity (in all sectors)
 Development program: Increase agricultural
productivity

 This may result in a number of projects like,

 Constructionof dams (irrigation infrastructure)
 Upgrading the skill of agricultural practices
 Construction of training centers
 Health program may have a number of projects like,
 Construction of hospitals
 Training of health officers
 Program and Projects hierarchy
28

Plan : National, Regional or company plan with development target

Program: Specific program within the frame of national or

regional plan (health, education)

Project: School project, Power plant or housing project

Work Package : Water supply and distribution package, Power

supply and distribution package

Task: Award of water supply contract, Construction of foundation

Activity
Classification of
Project
29

 Project can come in many size and form. They may be

very simple or complex. Major project types are two.
These are,

 Revenue project: Are those which can be carried out

within the normal organizational structure and normally
will be completed within the a single accounting period.

 Capital Project: Are those which can not be carried

out within the normal organizational structure and are
normally stretched over a number of accounting
periods.

 In practice many projects fall between these two

broad categories
Conti
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 Capital project always require considerablecapital

investment. The main feature of capital projects are,

 They usually occupy considerable time

 They usually employ huge capital investment

 As a result they do not fit readily into conventional

organizational structure but cut across functional and
time boundaries and thus, require an
organizational structure particular to themselves.

 When we say project we are mainly referring to the

capital projects.
Conti
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31

 In general projects be it revenue or capital can be

classified from different perspectives.

a) On the basis of time horizon project

can be Long term projects: Power

plant project
Medium term projects: Construction of a factory Short
term project: Exhibition,trade fair
Conti
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b) On the basis of the type of output:

Project producing tangible Products: Oil mill
Project providing services: Telecom project,
Education etc.
c) On the basis of the scope of the
project: International project: Euro tunnel
project National Project: Eth Hydro power
project Regional Project: Elementary school
project
d) Based on the economic sector:
Agricultural project: Irrigation project
Industry project: Cement Project
Service sector project: Bank projects
Conti
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e) On the basis of technology:

Capital intensive project: Brewery project
Labour intensive project: Textile industry project
f) Based on location:
Rural Projects
Urban
project
g) On the basis
of the nature of
the project
Independent
project:
Hospital,
 Chapter Two

PROJECT CYCLE
35
 PROJECT CYCLE
36

After pursuing this chapter, you should be able to:

OBJECTIVE

 Define Project Cycle

Describe the World Bank Project Cycle

S


LEARNIN

 Explain European Aid Project Cycle Approach

G
An Overview of Project cycle
37

 A project passes through a number of life cycles called project

cycle.

 What is project cycle?

 Project Cycle: Is the various stage through which project

proceed from inception to implementation. It is a stage which
project advance from inception to maturity stage.
 Conti
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…

 Some authors (Choudhury 2005) presents the projects life cycle

in to the life cycle curve
 Inception (concept, definition, organizing etc.)
 Maturity ( implementation )
 Decay (clean up)

Decay (Clean
Level Inception
up )
of
effort Maturity or
Implementation

Time
Conti
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 A project cycle covers all the steps necessary to bring a project to

the point where

its technical,
economic and
financial feasibilities have been established and it is ready for
appraisal.

 Each stage follows the proceeding one and leads to the next

 These different phases are identified by different institutions and

authors. Some of the phases as identified by different authors
are:
The Baum Cycle (World Bank Procedures)
40

 Baum (1970) model is the first basic model of a project

cycle which has been adopted by the World Bank.

 According to this model a project cycle consists of the

following
five stages

 Identification
 Preparation
 Appraisal and Selection
 Implementation
 Evaluation

 Later in 1978, the author has added additional two stages called
The European Commission/Europe Aid Approach
41

 This approach consists of six phases and has been

considered as the most recent approach developed as
guidelines for development projects

 Programming
 Identification
 Appraisal
 Financing
 Implementation
 Evaluation
The UNIDO Project Cycle
42

 The UNIDO has established a project cycle

comprising the following three distinct phases:

 1. The pre - investment phase

 2. The investment phase, and
 3. The operating phase
Conti
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 However, in most literature and guide books the stages or phases

of projects are divided into six phases and this approach are
preferred in this discussion:

 Identification
 Pre-feasibilitystudy
 Feasibility study
 Selection and project design
 Implementation
 Ex-post evaluation
I. Identification
44

 Project starts by generating potential idea that can be converted

into a meaningful project. It involves finding project’s idea, which
could contribute towards achieving specified
business/development objectives.

 In many cases many projects start as a simple idea and later on it

may grown up into a full-fledged project.

 Identification of promising investmentopportunities (projects

requires )
 imagination,
 sensitivity to environmental changes,
 And a realistic assessment of what the firm
can do
 Conti
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…
 If the project is a private project the initiating entity will define
the
 concept,
 expectation and
 objectives of the project.

 But, if the project is a public project, scrotal information is an

important source to define the concept, expectation and
objective of the project.
 Conti
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46

 Generally,the idea for project may come from the

following sources

 From the need to make profitable use of available resources (

this is for resources based projects)

 Market based projects arise from an identified demand in

home or overseas market

 Need based project may arise from the need of community

(company) to make available some basic materials (services)
requirements.
 Conti
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47

Project ideas can also from government

emanate and plans policy

From technical specialists like, entrepreneurs and

local leaders are also common sources of projects.

 Technical specialists and entrepreneurs can identify

many areas where they feel new investment might be
profitable.
 Conti
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 In general, thesources of project ideas can be

broadly classified into,

1. Macro-level

 National policies, strategies, sectoral, sub-sectoral or regional

plans
 General surveys which includes resource potential surveys,
regional studies, master plan and statistical publications,
which indicate directly or indirectly investment
opportunities.
 Conti
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49

 Constraints on the development process due to shortage of

essential infrastructure facilities

 Unusual events such as,

 droughts,
 floods,
 earth – quakes, hostilities, etc.

 From multilateral or bilateral development agencies and as

a result of regional or international agreements in which
the country participate.
 Conti
50
…
2. Micro Level:

 The identification of unsatisfied demand or needs

 The need to remove shortages in
 essential materials,
 services or
 facilities that constrain development efforts;

 The initiative of private or public enterprises in response to

incentives provided by the government;

 The necessity to complement or expand investments previously

undertaken. And the suggestions of financial institutions and
development agencies Study of new Technological Development
II. Pre feasibility
study
51

 After we have identified project ideas the next step

is project preparation and analysis.

Project preparation includes both Pre-

feasibility and
Feasibility studies

Once a project idea is identified a

preliminary project analysis will be done ( i.e., pre-
feasibility study).

Which means the project idea must be elaborated in sort of

study.
 Conti
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 Some of the main components examined during the pre-

feasibility study include:

 Availabilityof adequate market (or beneficiaries)

 project growth potential
 investment costs, operational cost and distribution costs
 demand and supply factors; and
 social and environmental considerations

 If the project is appeared to be sound the next stage

is a feasibility stage
 III. Feasibility
study
54

 Pre – feasibility study should be viewed as an intermediate stage.

 A feasibility study should provide all data necessary for an investment

decision

 The commercial,
 Technical,
 Financial,
 Economic and
 Environment

 for an investment project should be defined and critically examined.

Conti
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 Therefore, the structure of a pre – feasibility study should be the

same as that of a detailed feasibility study.

 The major difference between them lies on the amount of work

required in order to determine whether a project is likely to be
viable or not.

 Once the project is decided as viable using pre-feasibility study, a

detailed analysis of issues like, marketing, technical, financial,
economic, and ecological aspects is undertaken in the feasibility
stage.
Conti
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 Finally, the feasibility report should include (but not limited)

the following analysis:

 Market analysis
 Technical analysis
 Organizational analysis
 Financial analysis
 Social – economic analysis, and
 Environmental analysis
IV. Selection (project
appraisal)
58

 The feasibility study would enable the project analyst to select the
most likely project out of several alternative projects. Selection
follows, and often overlaps with the feasibility analysis.

 It addresses the question

 is the project worthwhile?

 A wide range of appraisal criteria have been developed to judge

the benefits of a project. The criteria are divided into two broad
categories.
 non-discounting criteria and
 discounting criteria.
Conti
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 After a project has been prepared, it is appropriate to forward for

a critical review (external review)

 This provides an opportunity to re-examine every aspect of the

project plan to assess whether the proposal is appropriate and
sound before large sums are committed

 Projects, appraisals cover the following aspects,

a) Technical – here the appraisal concentrate in
verifying whether the proposal will work in the way suggested
or not.
Conti
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 b) Financial – this will try to see

 if money needed for the project have been

calculated property,
 their sources are all identified,
 and reasonable plans for their repayment are
made where necessary.

 c) Commercial –

 the way the necessary inputs for the project are supplied
 and the arrangementsfor the supply of the products are
verified
Conti
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 d) Incentive – whether things are arranged in such a way that all

those whose participation is required will find it in their interest
to take part in the project, at least to the extent envisaged in the
plan.

 e) Economic – the appraisal here tries to see whether what is

proposed is good from the perspective of the national economic
development.

 The effects (positive and negative) are taken into account and
check if all are correctly valued
Conti
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 f) Managerial – this aspect of the appraisal examines if the

capacity exists for operating the project and see if those
responsible ones can operate it satisfactorily.

 Moreover, it tries to see if the responsible are given sufficient

power and scope to do what is required.

 g) Organizational – the appraisal examines the project how it is

organized internally and externally .
Conti
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 This helps to see if arrangement and its organization allow the

proposals to be carried out properly and to allow for change as
the project develops.

 These issues are the subjects of specialized appraisal report. And

on the basis of this report, financial decisions are made –
whether to go ahead with the project or not.
V.
Implementation
64

 The objective of any effort in project planning and analysis is to

have a project that can be implemented to the benefit of the
society.

 After the project prepared and evaluated the next step is

implementing the project. Implementation is the most important
part of the project cycle.

 In this stage,
 funds areactually disbursed to start the project and
keep running
 contracts are signed
Conti
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65

 A major priority during this stage is to ensure that the project is

carried out in the way and within the period that was planned.

 During the project implementation stage, the following

important points should be considered:

 All the stages of implementation should be completed with in

the time schedule allotted.
Conti
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66

 The output streamshould be the same as contemplated.

The physical targets are to be realized with in the financial
allocation.

 Project analysts (manager) must keep an eye over changes in

 technology,
 taste,
 price,
 profitability etc.

 In the case of private investments, profitability is to be so insured

that investment funds are expected from within.
Conti
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67

 However, problems frequently occur when the economic and

financial environment at implementation differs from the
situation expected during appraisal.

 For example, price or political environment may change.

 Due to these facts, project implementation must be flexible and

original proposals are modified frequently to capture these
changes.
Conti
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 Generally, project analysts divide the implementation phase

into three time periods

 The investment phase, where the major investments are made.

This may extend from three to five years.

 The development phase which may also extend from three to

five years.

 The project life.

 Conti
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69

 The implementation phase for an industrial project

consists of several stages:

(i) project and engineering designs,

(ii) negotiations and contracting,
(iii) construction
(iv) training, and
(v) plant commissioning.
 VI. Ex-post
evaluation
70

 The final phase in the project cycle is evaluation.

 Once a project has been carried out the actual progress with the
plans should be evaluated in order to judge whether the
decisions and actions taken were responsible and useful.

 However, evaluation is not limited only to completed projects.

 Conti
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71

 Ongoing projects could also be evaluated to find

solutions for problems when the project is in trouble.

 The evaluation may be done by,

 the project management,

 the sponsoring agency,
 or other bodies.

 Moreover,evaluationshould be undertaken when a project

is terminated or is well into routine operation.
 Conti
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72

 Some of thebenefits which can be obtained

evaluation are, from

 The reality of the assumptions that were made will

be evaluated;
 It provides an experience that is highly valuable in
future
decision making
 It suggests corrective action to be taken in the light of
actual performance;
 It helps in uncovering judgment biases;
 It induces a desired caution among project sponsors.
 Conti
…
73

 Generally, weakness and strengths should carefully be

noted so as to serve as important lessons for future project
analysis undertaking.
 Chapter Three

PROJECT
IDENTIFICATION

75
 PROJECT
IDENTIFICATION
76

After completing this chapter, you should be able to:

OBJECTIVE

 Explain the Project Idea

 Describe the sources of Project Ideas: Macro and

S

Micro sources
LEARNIN
G
 Conti
…
77

 The searchfor promising project is the first

idea towards establishing a successful step
venture.
 As traditional saying goes
 “ the key to success lies in getting into the right
business at the right time”
 Identification of meaningful project idea requires,
 Imagination
 Sensitivity to environmental changes
 Realistic assessment of what a firm or organization
can do
Conti
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 While thenotionof identification is simple it is

difficult to develop methods or procedure for
accomplishing it

 However,there are certain broad guidelines which

are helpful in the generation and screening of project ideas
 Conti
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79

 Project identification commonly follows the

following procedure

 1. Generation of ideas
 2. Monitoring the environment
 3. Corporate appraisal (self-assessment)
 4. Preliminary screening
 5. Project rating index
3.1. Generation of ideas
80

 Most of the new projects ideas are a result of

 Once specialized technical

knowledge or
 Marketing expertise or
 Some other competence
 Conti
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81

 To stimulate theflow of project idea thefollowing are

helpful

i. Analysis of Strength, Weaknesses, Opportunities

and Threats (SWOT):

 SWOT analysis represents a conscious and

deliberate , and dynamic effort by an organization
to identify opportunities that can be exploited
 Periodic SWOT analysis facilitates the generation of
new idea
Conti
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82

ii. Clear articulation of objectives

 The operational objectives of the organization may help

to generate ideas

 The operational objective of business firm for example,

 Cost reduction
 Productivity improvement
 Increase in capacity
 Expansion and growth

Can be helpful in generating the project idea

3.2. Monitoring the environment
83

 The organization must systematically monitor the

environment in which it will operate

 In other words the organization is expected to monitor the

following key environmental factors in relation to each of
identified ideas

 1. Economic aspects
 State of the economy

 Possible fluctuation in the economy

 The degree of integration with the world economy

 Conti
…
84

2. National policy

 Sectoral policy
 Government program
 Tax policy
 Government support
 Financial policy

3. Technological factor
Availability of technology
Accessibility of the available
technology
Conti
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85

4. Socio demographic factor

Population size and
distribution Education level

5. The nature of competition (for business

firms) Number of firms in the industry
Nature of entry

6. Nature of input
supply Availability
Cost of raw material
3.3. Self assessment and scouting the project
idea
86

 A realistic appraisal of the organization’s strength and

weakness is essential to select the best idea that can be
realized as a successful venture.

 To screen the project idea in terms of this aspect the

following suggestions are helpful
 Conti
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87

 A. Analyze theindustry (sector) and theorganization

in terms of,

 Its capacity (i.e., whether the organization has the capacity to

implement or to put into practice the proposed idea)

 Analyze the project in term ofthe benefit (profit) that it

will
provide to the society (firm)
 Conti
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88

 B. Examine the input or resources requirement and firms

ability to make it available

 C. Review its innovativeness

 D. Study government plan, outlays, and guidelines: This

analysis is important because;

 It will help to see if the idea is in line with the government

priority area
 To check if there are guideline that need to be followed if the
project idea is acceptable.
 E. Suggestion of financial institutions and development
agencies. (that is investigating priority area of development
agencies)
 3.4. Preliminary
screening
89

 In some case it is possible to have a long list of project ideas.

 In such cases some kind of preliminary screening is required

to eliminate ideas which are not promising.

 For that purpose the following aspects could be looked into

 A. Compatibility with thepromoter: The idea

should be compatible with
 thevision,
 mission,
 and goal of the promoter
 Conti
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90

In business venture, it should be compatible with the

owner’s objective. In other words,

It has to fit with the personality of the owner

Acceptable to the firm’s owner
It offers the prospect of rapid growth and high return

 B. Consistence with government priority: Evaluate the

project idea in terms of the government priority. Here we ask
questions like,

Is the project consistent with the national goal and priority?

Are there any environmental effect?
Will there be any difficulty to obtain permission?
Conti
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91

 C. Availability of inputs
 D. Adequacy of the market
 E. Cost of the project
 F. Acceptability of risk level: The desirability of the
project idea depends upon the level of risk associated with
it

 When a large number of project ideas are evaluated, it may

be helpful to streamline the process of preliminary
screening.
 3.5. Project rating
index
92

 For that purpose a preliminary evaluation may be

translated into a project rating index.

 Steps involved in the process of the project rating index

are,

 Identify factors relevant for project rating

 Assign weight to those factors (the weight are
suppose to
reflect their relative importance)
 Rate the proposed idea on various factors using a suitable
rating scale (typically a 5-7 point scale is used)
 For each factor, multiply the factor rating with the
factor
weight to get the factor score
 Factor VG G A P VP Factor
Factors 5 1 score
weight 4 3 2
Input
93
availability 0.25 X 0.75

Technical know how 0.1 X 0.40

Reasonableness of cost 0.05 X 0.20

Adequacy of market 0.15 X 0.30

Complementary relationship 0.05 X 0.20

Stability 0.1 X 0.5

Dependency on firm’s 0.2 X 0.2

strength
Consistency with government 0.1 X 0.1
policy
Total 1.00 3.15
 3.2. MACRO AND MICRO
SOURCES
94

 Projects are expected to contribute towards the attainment of

specified development objectives.

 Project identifications endeavors should be seen as an integral

part of the macro-planning exercise.
 Project identifications need to be carried out within national,
regional, and sectoral development framework and existing
policies including pricing, taxation, and subsidy.
 Conti
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95

 Impossible to prepare an exhaustive list of sources – much

depends on the experience and imagination of those entrusted
with the task of initiating development projects.

 We can distinguish two levels where project ideas are born:

macro sources and micro sources.
 MACRO
SOURCES
97

 Major Macro Sources:

 Federal/Central or Regional
Governments
 Bilateral and Multilateral Agreements

 International Development Agencies

 Conti
…
99

Other Macro Sources:

 National policies, strategies, and priorities articulated

government from time to time. by

 National, sectoral, sub-sectoral, or regional plans

and
strategies (supplemented by special opportunity studies).

 General surveys, resource potential surveys, regional studies,

master plan and statistical publications, which indicate
directly or indirectly investment opportunities.
 MICRO
SOURCES
102

 Micro sources of project ideas includes

 Privateand Public Enterprises;

 Local Groups or Organizations;

 Consumer Groups and Associations;

 Financial Institutions/Credit Associations;

 Cooperatives, Farmers’ Unions, etc;

 New Technology Suppliers, and even individuals.

 Conti
…
103

Driving forces behind:

 Identification of unsatisfied demand or needs;
 Existence of unused or underutilized natural or human
resources and the perception of opportunities for their
efficient use;
 Need to remove shortages in essential materials, services, or
facilities that constrain development efforts;
 Initiatives in response to incentives provided by the
government;
 Necessity to complement or expand investments
previously undertaken;
 Desire of local groups(or organizations) to enhance
their economic status and improve their welfare.
 Group Assignment (20%) - Project Proposal
Writing
105

This is a group assignment and you form a group containing 4-5

members and take any one of the following project ideas and
write a project proposal.

 1. Five star hotel

 2. Leather processing factory
 3. waste recycle project
 4. small scale solar energy technology project
 5. a railway project
 6. franchising soft drinks factory project
 7. supermarket with mail service project and others based on
the group interes (Use the guide line provided)

Late submission Date:

Reflections
 PROJECT ANALYSIS
&
MANAGEMENT

CHAPTER 4
FINANCIAL ANALYSIS
OF PROJECTS
 4.1. Prelude

The key steps involved in determining whether a

project is worthwhile or not are the following:
Identify the estimated costs and benefits of the project,
• This is done in accordance with the conceptual/theoretical aspects
Assess the riskiness of the project and calculate the
cost of capital, and
Compute the criteria of merit and judge whether the
project is good or bad.
 4.2
4.2 PROJECT
PROJECT APPRAISAL
APPRAISAL METHODS
METHODS
There are two important methods for judging weather
capital projects are worthwhile or not.
1. Traditional methods (Non-discounting criteria)
 Pay back period (PBP)
 Accounting rate of return (ARR)
 
2. Discounted cash flow methods (Discounting criteria)
 Net present value
 Benefit-Cost Ratio (BCR) or Profitability Index (PI)
 Internal Rate of Return

7-92
I. The traditional technique /Non discounted cash
flow Techniques:

 I. Pay Back period Method: It is also termed as "Pay-

out period" or Pay-off period.
 Under this method the focus is on the

recovery of original investment at the

earliest possible.
It determines the number of years to recoup
the original cash out flow, disregarding the
salvage value and interest.
Conti..
.
 The decision rule under the Pay Back method

 Accept the project if project’s PB < standard PB

 Reject the project if project’s PB > standard PB

 Calculation of Pay-back Period: Pay-back period can be calculated

into the following two different situations:
i) In the case of equal cash inflows:

Pay back period = Cash outlays(Initial Investments)

Annual Cash inflows
 Illustration: A project requires initial investment of Br. 40,000 and

it will generate an annual cash inflows of Br. 10,000 for 6 years.

You are required to find out pay-back period.

 Solution: Calculation of Pay-back period :

Pay back period = Br. 40,000 = 4
years
Br. 10,000
 Pay-back period is 4 years, i.e., the investment is fully recovered
in 4 years.
(ii) In the case of uneven or unequal cash
inflows:
 In the case of uneven or unequal cash inflows, the Pay-back period
is determined with the help of cumulative cash inflow. It can be
calculated by adding up the cash inflows until the total is equal to
the initial investment.

 Illustration: From the following information you are required to

calculate pay-back period: A project requires initial investment of
Br. 40,000 and generate cash inflows of Br. 16,000, Br. 14,000, Br.
8,000 and Br. 6,000 in the first, second, third, and fourth year
respectively.

Solution:
 Calculation Pay-back Period with the help of "Cumulative
Cash Inflows"
Conti..
.
Year Annual cash inflows Br. Cumulative cash inflows Br.
1 16,000 16,000
2 14,000 30,000
3 8,000 38,000
4 6,000 44,000
Cont.

1. Unequal cash flows

Payback= year before full recovery + unrecovered cost at start of year

Cash flow during year

Decision rule:
Shorter is the payback period better is the project
Conti
…
 The above Table shows that at the end of 4th years the cumulative
cash inflows exceeds the investment of Br. 40,000. Thus the pay-
back period is as follows:

 Pay Back Period= 3 years + Br.40,000 - Br.38,000

Br.6,000

= 3 years + Br.2,000
Br.6,000
= 3.33 years
Conti..
.
 Illustration: From the following information advice the management
as to which project is preferable based on pay-back period. Two
projects X and Y, each project require an investment of Br 30,000.
The standard cut off period for the company is 5 years.

 (Net profit before depreciation and after tax)

Year Project X Project Y

1 10,000 8,000
2 10,000 8,000
3 4,000 14,000
4 6,000 6,000
5 8,000 7,000
Conti..
.
Solution: Calculation of Pay-back Period
 Project X =

 Br.10,000 + Br.10,000 + Br.4,000+Br.6,000

= Br 30,000 is recovered in 4th Year

 Project Y =

 Br 8,000 + Br 8,000 + Br 14,000

= Br 30,000 is recovered in 3rd Year

 The Pay-back period of project X and Y are 4 years and 3 years

respectively and thus project Y should be preferred because it
has a shorter pay-back period.
Conti..
.
 Advantage of payback period

 It is simple to understand and easy to calculate

 It facilitates to determine the liquidity and solvency of a firm
 It enables the firm to select an investment which yields a quick
return on cash funds
 It used as a method of ranking competitive projects
Conti
…
 Weaknesses of Payback:

 It Ignores the time value of money.

 This method does not consider income beyond the pay-back
period
 It does not measure the profitability of a project
2. Accounting Rate of Return or Average Rate of Return (ARR)
method /ROI

 This method focuses on the average net income generated in a

project in relation to the project's average investment outlay.
Here, instead of taking the annual cash flows, we take the
annual profits into account.

 The ARR is found out by dividing the average profit after- tax by
the average investments.

ARR = Average profit after tax × 100

Average investment
Conti
…
 Average profit after tax = Total of profit after taxes
Number of years

 Average investment would be equal to the Original investment

plus salvage value divided by Two

 Average cost of Investment =

Original costs or Inv’t + salvage value
2
Conti
…
 Illustration: Consider the project that has the original investment
of Br. 70,000 Br, the life of 4 years, and the salvage value of Br.
6,000 at the end of year 4. The straight line method of
depreciation is used. Income before depreciation and taxes are
Br. 40,000 for year 1, Br. 42,000 for year 2, Br. 36,000 for year 3,
and Br. 50,000 for year 4.

 Determine the accounting rate of return if income tax rate on the

project is 40 percent.
Conti..
.
Solution:
 Average investment = (70,000+6000)/2 = Br.38,000

 Annual depreciation = (70,000-6,000)/4 = Br.16,000

 Then compute the new profit for each year during the four
years.
Conti...

Year 1 Year 2 Year 3 Year 4

Income before depr. & taxes 40,000 42,000 36,000 50,000

Less: Annual depreciation 16,000 16,000 16,000 16,000
Income before taxes 24,000 26,000 20,000 34,000
Less: Income taxes (40%) 9,600 10,400 8,000 13,600

Net profit 14,400 15,600 12,000 20,400

Conti..
.
 Then we compute the average Net Profit during the four
years.

 Average net profit =

 (14,400+15,600+12,000+ 20,400)/4 = Br.15,600

 Hence, ARR = Average Annual net profit =

Average cost of investment

Br 15, 600
Br 38,000
Conti..
.
 This is to mean that for an average of Br.1 invested in this
project, there is an average return of 41 cents in the form of net
profit per year over the entire four years of the life of the project.

 The decision rule under the ARR method:

The ARR is compared to the predetermined rate.
The project will be accepted if the actual ARR is higher than the
desired ARR. Otherwise it will be rejected
 Assume in previous case that the desired ARR was
30%. Since the actual ARR is $, 41% the project is
accepted.
Conti..
.
Advantage

 Easy to understand and calculate

 Give more weight age to future receipt

 Disadvantage

 Ignores the time value of money

 Does not use cash flows
 No objective way to determine the minimum acceptable rate
of return.
II. The Discounted Cash flow Criteria
(Techniques)
 These techniques employ the time value of money concept.

 1. Net Present Value

 It is the difference b/n the present value of investments cash

inflows (market value) and the present value of its cash
outflows (its cost).
 NPV is the measure of how much value is created or added
today by undertaking an investment.
 The capital budgeting process can be viewed as a search for
investments with positive NPVs.
NPV= - CF0 + CF1 + …..+ CFn
0 1 n
Conti..
.
 To this method properly, the following procedures
use
followed.
are

 Find the present value of each cash flow, including both

inflows and out flows using the cost of capital of the project
for discounting.

 Sum the discounted cash inflows and the discounted cash

outflows separately.

 Obtain the difference between the sum of the cash inflows and
outflows.
Decision rule for the NPV
method:

In general, the decision rule is:

• Accept the project if the net present value is positive
• Reject the project if the net present value is negative
• If the NPV is zero, it is a matter of indifference

 If the projects, on the other hand, are mutually exclusive, the one
with the higher positive NPV should be accepted leading to the
rejection of the projects with lower positive NPV.
Conti..
.

 If the project has a positive NPV, it is generating more cash than

needed to service its debts and to provide the required rate of
return to the shareholders, and this excess cash accrues solely to
the firm's shareholders.
Conti..
.
 Illustration: Assume that a given project is expected to have an
initial investment and project life of Br.40,000 and 5 years
respectively. The annual after-tax cash flow is estimated at
Br.12,000 for each one of the five years. Using the required rate of
return of 10 percent.

 Required:
A. What is the net present value (NPV) of the project?
B.How do you judge the acceptability of this project?
 Solution. In the case of this project, there are annuity cash inflows
of 12,000 every year for five years and single cash out flow of
40,000 at time zero.
Conti..
.
 The present value of the annuity cash outflows is:
 Present value of annuity = (12,000) Annuity factor)
 The annuity factor is 3.791

PVA = (12,000) (3.791) = 45,492Birr

 PV of Cash out flows = 40,000Birr

NPV = PV of inflows less PV of outflows

= 45,492 - 40,000 = 5,492Birr
Conti..
.
 Since the project makes the net present value (NPV) of positive
5,492Birr, it should be accepted.

 Consequently, the wealth of the shareholders would increase by

5,492Birr in total as the result of accepting and running this
project
Conti..
.
 Illustration: Consider the following mutually exclusive
project alternatives, together with their cash flows
Alternative Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

A (80,000) 20,000 25,000 25,000 30,000 20,000

B (100,000) 25,000 20,000 30,000 35,000 40,000

Conti..
.
 The required rate of return on both projects is 12 percent. Then,
evaluate these projects using the net present value method.

 Solution. As you can see the cash flows from both projects are
not in annuity forms. The cash flows are irregular for both
projects.

 Hence, we need to discount each of the cash flows individually.

Then the individual discounted cash flows are added.
Present value table
Conti..
.
 The net present value (NPV) for project A
Year
is: Cash flows Discount Factor (12%) Present Values
1 20,000 0.893 17,860
2 25,000 0.797 19,925
3 25,000 0.712 17,800
4 30,000 0.636 19,080
5 20,000 0.567 11,340
Present values of cash inflows (sum) 86,005
Present values of cash outflows 80,000
Net Present Value (NPV) 6,005 Birr
Conti..
.
 The net present value (NPV) for project B
is: Cash flows
Year Discount Factor (12%) Present Values
1 25,000 0.893 22,325
2 20,000 0.797 15,940
3 30,000 0.712 21,360
4 35,000 0.636 22,260
5 40,000 0.567 22,680
Present values of cash inflows (sum) 104,565
Present values of cash outflows 100,000
Net Present Value (NPV) 4,565 Birr
 2. Profitability Index
(PI)
 PI, method compares the present value of future cash inflows with
the initial investment on a relative basis. Therefore, the PI is the
ratio of the present value of cash flows (PVCF) to the initial
investment of the project.
PI= PV of future cash flows
Initial Investment

 PI shows the profitability of any project, or the

present value per dollar of initial cost.

 In this method, a project with a PI greater than 1 is accepted, but a

project is rejected when its PI is less than 1.
Conti..
.
 Note that the PI method is closely related to the NPV approach.

 In fact, if the net present value of a project is positive, the PI

will be greater than 1.
 if the net present value is negative, the project will have a PI
of less than 1.

Acceptance rule:
 Accept if PI > 1.

 Reject if PI < 1.
 May Accept if PI = 1

 When PI is greater than one, then the project will have

positive net present value.

Cont.

 Example: To illustrate the calculation of these measures, let us

consider a project, which is being evaluated by a firm that has a cost
of capital of 12 percent. In this regard, assume that the initial
investment on the project amounts to Birr 100,000 and the estimated
cash flows over its economic life are as given below:

Required: PI?

PI= PV of future cash flows = 114456.3 = 1.145

Initial Investment 100000
Accept project if pi>1 Reject if PI <1
3. Internal Rate of Return(IRR)
3. Internal Rate of
Return(IRR)

 It is a return generated by a firm by accepting a project. It is the

discount rate which equates the present value expected cash flows
with the initial investment outlays. In other words, IRR is a method
of ranking investment project proposals using the rate of return on
an asset (investment).

 At IRR, the sum of the present values of all cash inflows is equal to
the sum of the present values of all cash outflows.

 That is: PV (cash inflows) = PV (cash outflows). In other words, it is the

rate at which the net present value of the investment is zero.
Computing the Internal Rate of
Return
 a) Uniform Cash Inflows over the Life of the Project
 In this case, the present value table of an annuity can be used to
calculate the IRR since the cash inflows are in annuity form.

 The following steps can be followed to calculate IRR for constant

cash inflows.

 Step 1: Find the critical value of discount factor,

 Critical value of discount factor = Initial investment

Annual Cash inflow
Conti..
.
 Step 2: Find the IRR

 Illustration: assume that a project has a net investment of 26,030

Birr and annual net cash inflows of 5000Birr for seven years.
What is the IRR of this project?

 Solution: Critical value of discount factor

= 26,030 = 5.206
5,000
Conti..
.
 After determining the critical value of discount factor, we look for
the value that is equal to this critical value of discount factor in
the present value of annuity table across the line corresponding
to 7 years (i.e n =7).

 The critical value of discount factor of 5.206 appears in the 8

percent, column on the line/row of 7 years. Therefore, the IRR is
8 percent.
Conti..
.
 Computing the Internal Rate of
Return
 b) Irregular Cash Inflows over the Life of the Project

 In this case the Internal Rate of Return can be found

out by
Trial and Error Method.

 First, compute the present value of the cash flow from an

investment, using an arbitrarily selected interest rate, for
example 10%.
Conti..
.
 Then compare the present value so obtained with the
investment cost. If the present value is higher than the cost of
capital, try a higher interest rate and go through the procedure
again.

 On the other hand if the calculated present value of the

expected cash inflows is lower than the present value of cash
outflows, a lower rate should be tried.

 This process will be repeated until and unless the Net Present
Value becomes zero.
Conti..
.
 Illustration:

 The cost of a project is Br. 32,400. It is expected to generate cash

inflows of Br. 16,000, Br.14,000 and Br. 12,000 through it three
year life period. Calculate the Internal Rate of Return of the
Project.
Solutio
n:

 To begin with let us try a rate of 18% and calculate the present
value of cash inflows on this rate. The following table will give
the calculations:

Year Cash DF18% PV DF16% PV DF14% PV

Inflows
1 16000 0.847 13552 0.862 13792 0.877 14032

2 14000 0.718 10052 0.743 10404 0.769 10766

3 12000 0.609 7305 0.641 7692 0.675 8100

Conti...
 PV of Cash inflows 30912 31886 32898
 Less value of Cof 32400 32400 32400
NPV (-)1488 (-)514 (+)498
= (-)

 From the above table of Calculation is can be observed

that the real rate lies in between 14% and 16%.

 Therefore let us select 15% as the internal rate to ascertain its

applicability
Conti..
.
Year Cash inflows DF15% PV
1 16000 0.870 13920
2 14000 0.756 10584
3 12000 0.658 7896
 PV of Cash inflows = 32400
Less value of cash outflows = 32400
Net Present Value = 0

 Thus, the net present value at 15% rate is zero. It indicates that
the present value of cash inflows is equal to the present value of
cash outflows.
 Thus internal rate of return 15% for the project under review.
…cont’d

Decision Rule:
o Accept the project if the IRR is greater than
the cost of capital,

o Reject the project if the IRR is less than the

cost of capital, and

o The decision maker will be indifferent if the IRR

is equal to the cost of capital.
 CHAPTER 5
PROJECT FEASIBILITY STUDY
5.1. Market and Demand Analysis
The objectives of market and demand analysis in preparing project are
to:
Identify potential consumers or buyers
Indicate the total current demand
Identify the pattern of demand temporally as well as geographically.
Know customers’ willing to pay for the proposed services or product.
Determine price and warranty if that will ensure the intended
outputs.
Identify appropriate channels of distribution for the product or
services.
Explore the prospects of immediate and future sales
Formulate strategy that intends to convince potential consumers
about the proposed out put.
The key steps in market and demand analysis that can be taken in to
account include:
Situational Analysis,
Gathering Secondary and/or primary data/ information,
Market survey,
Market classification,
 Demand forecasting, and
Market planning
The information collected in a market survey may include:
Total demand and its rate of growth
Purchasing power and its rate of growth
Satisfaction with the existing product or service.
Motives of seeking the existing product or service
Unsatisfied needs or demand
Distribution patterns and preferences
Attitude towards the product or service
Socio- economic conditions of the consumers
These information need to be collected and analyzed in the context of the proposed
project.
5.2. Technical Analysis
This part on technical analysis focuses on describing:-
Problem analysis
Technical Design
Choice of technology
Relevant standards and codes of practices
How inputs related to outputs
Choice of alternatives
5.3. Environmental Analysis
This section of the unit focuses on:
Environmental sustainability of a project
Stages of environmental assessment.
The meaning of Environmental Impact Assessment.
Assessment of migration measures, strategies and costs.
Environmental valuation Techniques
Environmental management plan
5.4. Social Analysis
If social assessment is primarily concerned with
ensuring that project, and consequently the
development process is ‘people-centered,’ then the
following points must be taken in to account in any
project formulation exercise. These are:
Identifying of stakeholders and target groups
Participation issues
Social impact assessment (SIA)
Assessing of mitigation measures, strategies and costs
of SIA.
5.5. Institutional Analysis
This section, therefore, focuses on describing:
Institutional setting and legal framework
Organizational capacity assessment
Capacity building strategies
5.5.1. Institutional Setting and the Legal
Framework
5.5.2. Organizational Capacity Assessment
In general, there are organizational
arrangements for implementing a project as
appropriate
5.6. Financial Analysis
Types of financial cost and benefits.
Financial viability
Financial plan.
Stakeholders’ incentives
Cost effectiveness Analysis
Financing of maintenance and recurrent costs.
5.7. Economic Analysis
Economic analysis is a means of determining project
costs and benefits for the national economy as a
whole. This section provides an illustration on the:
Purpose of economic analysis
Externalities and linkages
Environmental valuation
National economic parameters
 UNIT 6
PROJECT IMPLEMENTATION AND
GOVERNANCE
6.1. Project Implementation
Identification of project Activities and
Responsibilities

The identification of project activities and

responsibilities is one of the first stages in
implementation planning.
Implementation planning involves an analysis of the
individual activities their resources requirements,
method of implementation and responsible authority.
The project implementation plan consists of the
following components:
Activity Description sheets
Gantt Chart
Project Resource Smoothing
Project Resource Budgeting
6.1.1 Activity description sheets contain information
concerning resource use, implementation time and
responsibility for each project activity
6.1.2. The Gantt chart is a way of representing the
implementation plan in diagrammatic form.
It is based on the network diagram with activity and
float times determined as a result of network analysis.

The Gantt Chart enables the planners to see when

several activities have to be implemented at the same
time. This will obviously place greater strain on available
resources (especially skilled labor).
6.1.3. Resource smoothing is a method of deciding
which activities can be delayed beyond their earliest
start time (with in the confines of their slack time so
that overall project completion isn’t delayed) in order to
use the available resources most efficiently.
6.1.4. project budget should be drawn up using the information
gained from the activity description sheets, Gantt chart and
resource smoothing.
6.2. Project Governance
It is vital to establish the management structure for the project
and identify the specific role players, their responsibilities,
accountabilities and the interaction between them for the life
of the project.
This section includes Project governance which deals
with:
The objectives of project governance
Project roles of each position in a project governance structure
Steering Committee roles and functions
Program of interlinked projects (Program Management)
Project Portfolio Management  
Keys to effective governance are:
Governance, including roles and responsibilities, is
clearly defined, agreed to and signed-off by the
Steering Committee, as detailed in the Project
Business Plan.
A Steering Committee should be representative of the
Project Business Owner(s), and Key Stakeholders, as
appropriate.
Status reporting of the project’s progress is against the
milestones, as outlined in the Project Business Plan, as
well as identified risks and issues for the project.
Selecting the right Project Manager
A project manager is:
 a professional in the field of project management.
Project managers can have the responsibility of
planning, execution, and closing of the project.
The Project Manager is the key person around which
the project will ultimately revolve, and appropriate
selection of the Project Manager and Team, resourcing
of the Team and delegation of authority is critical
Project Roles
All projects must have the roles of different stake holders
which include:
Project Sponsor,
Business Owner(s), and
Project Manager; within the governance structure. That
is:
A person responsible and accountable for the project
and securing of its Target Outcomes (Project Sponsor)
A person(s) who will manage the project outputs after
project closure, and is accountable for realization of the
Target Outcomes (Business Owner(s)
A person who will manage the project and deliver the
outputs (Project Manager)
Project Sponsor
The Project Sponsor has ultimate accountability and
responsibility for the project and is a member of the
Steering Committee, usually the Committee Chair
(sometimes referred to as Project Owner).
The Sponsor oversees the business management and
project management issues that arise outside the
formal business of the Steering Committee.
The Sponsor also lends support, by advocacy, at senior
levels, and ensures that the necessary resources (both
financial and human) are available to the project.
Steering Committee
The Steering Committee is responsible for policy and
resourcing decisions essential to the delivery of project
outputs and the attainment of projecttarget/outcomes.

 It is also responsible for ensuring appropriate

management of the project components outlined in
the Project Business Plan, including ultimate
accountability for ensuring appropriate risk
management processes are applied
Business Owner
The Business Owner(s) is responsible for managing the
project outputs for utilization by the Project Customers.
There may be one or more Business Owners, at a number of
managerial levels, depending on the size of the project.
The Business Owner(s) must be satisfied that the project
includes all of the outputs necessary for outcome/benefits
realization.
Each output must be specified and delivered fit-for-purpose.
Usually the Business Owner(s) is accountable to the Project
Sponsor or their delegate(s), who may be Senior
Management in the Agency, for the realization of project
Target Outcomes.
One or more Business Owners are usually Steering
Committee members
Business Customers
There may be other Government Agencies or Business
Units that will utilize the project outputs, but do not
have management responsibility for their ongoing
maintenance or accountability for the realization of
outcomes/benefits.
These are known as the Business Customers.
Sometimes the Project Observer or the Project
Business Owner(s) represents the interests of the
Business Customer(s).
Project Customers/beneficiaries
They are persons or entities that will utilize the project
outputs to generate the outcomes/benefits.
Project Observer
In a large, complex or politically driven projects, possibly
involving whole-of-government or more than one Agency,
the Project Observer is usually present at Steering
Committee meetings or Project Team meetings to act as an
information channel to the Agency they are representing.
The Project Observer cannot participate in decision-
making while attending meetings, but may raise issues for
discussion on the understanding that those issues may or
may not be addressed or resolved as part of the meetings.
The issues may be considered outside of the formal
meeting structure
Quality Consultants
Large projects generally engage one or more quality
consultants to undertake formal quality reviews of the
project’s processes or outputs.
These consultants work independently of the Project
Team, and are often contracted from outside the
organization
Project Manager
The Project Manager is contracted by the Project Sponsor and Steering
Committee (or in small projects the Project Sponsor), to deliver the
defined project outputs.
She/he is responsible for:
 organizing the project into one or more sub-projects,
managing the day-to-day aspects of the project, developing the Project
Execution Plan(s);
 resolving, planning and implementation issues, and monitoring
progress and budget. The Project Manager will:
Develop and maintain a Project Execution Plan(s)
Manage and monitor the project activity through detailed plans and
schedules
Report to the Project Sponsor and Steering Committee at regular
intervals
Manage (client/provider/stakeholder) expectations through formal
specification and agreement of goals, objectives, scope, outputs,
resources required, budget, schedule, project structure, roles and
responsibilities
Project Team
The Project Team is led by the Project Manager, working for
the successful delivery of the project outputs, as outlined in
the Project Execution Plan(s).
 It is desirable that the Project Team includes representatives
from the Business Unit(s) affected by the project.
The composition of the Team may change as the project
moves through its various phases.
The assessment and selection of people with the requisite
skills required for each phase of a project is critical to its
overall success.
The skills should be explicitly identified as a part of the
project planning process.
 The Project Team is responsible for completing tasks and
activities required for delivering project outputs.
 
Reference Groups
Reference groups provide forums to achieve consensus
among groups of stakeholders.
The group may already exist, have an indefinite life
span or may continue for the life of the project.
One such group might be a general reference group
delegated by the Steering Committee to monitor or
modify the Project Business Plan for approval by the
Steering Committee.
The group also may consist of collection of people
with like skills to address a particular set of issues. An
information technology reference group is an example
Working Groups
Working groups consist of small specialist work
groups, each dedicated to producing a well-defined
output within a specific timeframe.
A working group has no life beyond the delivery of
that output.
Working groups probably involve one or more
members of a Project Team to support activity.
Consultants
Consultants are employed from outside the organization to
provide specialist or other expertise unavailable from internal
resources.
The consultants may report directly to the Chair of the
Steering Committee (or perhaps the Chair of a general
Reference Group). Typically Project Consultants may include:
Information technology specialists who define and manage
the technological aspects of the project
Representatives employed by stakeholders to ensure their
interests are represented and managed
Legal advisers who assist in the development and review of the
contractual documentation
Auditors who ensure compliance with internal and external
audit requirements
Contractors
Contractors also may be engaged to work as part of the
Project Team.
Contractors are employed, external to the business
area, to provide a specified service in relation to the
development of project outputs. Examples include:
Prepare and deliver training to staff in the business
area
Develop and deliver marketing programs
Develop guides and/or manuals
Develop business application software
Steering Committee responsibilities involve five
main functions:
Approval of changes to the project and its supporting
documentation
Monitoring and review of the project
Assistance to the project when required
Resolution of project conflicts
Formal acceptance of project deliverables
UNIT SEVEN: PROJECT MONITORING AND
EVALUATION SYSTEM
7.1 Project Monitoring
Monitoring assesses whether project inputs are being
delivered, are being used as intended (to create out puts)
and are having the initial effects as planned.
Monitoring is an internal project activity, an essential
part of good management, and therefore, an integral part
of day to day activity.
The primary function of monitoring is to provide and use
data in such a way that management can improve
performance in the future.
The basis of project monitoring systems is to track actual
progress against planned progress at any given time.
This covers financial progress (monitoring of actual
expenditure against budgeted expenditure) as well as
the progress of project activities.
Monitoring systems should be considered alongside
the implementation plan because it is the targets set
out in these plans which form the targets for
monitoring.
The whole system is therefore often referred to as
‘integrated planning, implementation and monitoring
system’ (IPIMS).
Monitoring systems should, at all times:
be concerned with future progress
Be simple and cost effective
Be able to detect deviations quickly and accurately
Be verifiable
 When designing a monitoring system, the project
formulator should keep the following points in mind:
Identify key personnel or informants for the
monitoring information. These could include line
managers, accountants, contractors and suppliers, etc.
Indicate frequency of data/information collection time.
Remember that data is only effective once it has been
processed. Avoid collecting data for data’s sake-this
gives the semblance of a monitoring system with out
serving any useful purpose.
Identify responsibilities for data processing: Assign
also responsibilities to act on the results of these data.
Try to attain the right combination of speed and
accuracy. Sometimes a trade-off has to be made
between the two, with information that is extremely
accurate leading to delays in taking effective remedial
action.
Make sure that the monitoring system only intends to
processes that data which is necessary. Monitoring
information increases the workload so it is important
that only the most essential data is requested for
processing.
Monitoring systems in themselves are ineffective
unless they are linked to an effective control system
which will allow the manager to take swift and
effective action to remedy and deviations from the
implementation plan.
Monitoring systems have to be considered for both
project implementation and operations. Systems
concerned with implementation measure the project’s
effectiveness in converting inputs to outputs; while
monitoring systems concerned with operations
measure the project’s effectiveness in converting out
puts in to immediate and wider objective.
 Information acquired through monitoring systems
can be divided in to three categories:
Monitoring of physical progress
Monitoring of financial progress, and
Monitoring the quality of project out puts
A. Monitoring physical progress
The primary purpose of physical progress monitoring
is to ensure whether project activities are on schedule.
This can be achieved through milestone monitoring
and time chart monitoring.  
B. Monitoring Financial Progress
This involves comparing actual expenditure against
the financial plan (budget) produced as part of the
implementation plan.
The project must therefore have a cost reporting
system in place to enable a comparison of actual and
predicated costs.
It is unwise to rely on existing accounting systems to
provide this information as these systems are liable to
be slow and to categorize expenditure using different
methods to those desired by the project manger.
C. Monitoring the Quality of Project Outputs
This involves ensuring that outputs are delivered
according to specification.
This is normally done through a system of direct
inspection and supervision.
Monitoring is sometimes carried out by outside agencies
against a set of internally or nationally recognized
standards.
A formal agreement between the implementing agency
and the project owner that project out puts are
satisfactory is known as signing-off.
Each project will have its own quality assurance features
in operation and it is important that the quality control
aspect is not over looked during project design.
7.2. Project Evaluation
Evaluation is the structured process by which a project
activities and achievements are assessed and
understood.
It provides information, for those who are involved in
the project such as managers, promoters, founders
and/or policy makers.
Evaluation, in addition to quantitative question,
attempts to answer also qualitative questions.
Evaluation could be ongoing (mid –term), terminal or
ex-post.
A good evaluation system in a project from the outset
may assist the project implementers in identifying
difficulties that hinder the progress of the projects as
planned and avoid repeating mistakes in the future
endeavors.
It is therefore, crucial to identify clearly the main
actors for the evaluation exercise during the project
formulation.
The preliminary function of evaluation after project
completion is to use data on the performance of
projects in such a way that new projects can learn from
experience.
7.3. Project Sustainability
Sustainable is the ability of a project under
consideration to continue its operation or provision of
services and/or production with out interruptions for
the period under design.
It also includes the managerial and technical capacity
and capability of the project personnel in the
operation and running of the project to meeting its
desired objectives.
A project is sustainable if its net benefits continue
throughout the life of the project at level sufficient to
meet the predetermined objectives.
 GUIDLINE FOR
PROJECT PREPARATION
Projects can be identified by many different agencies
depending on the type of projects under consideration.
Public sector projects might be identified by:
Government ministries
Local governments
Local politicians and pressure groups
State owned enterprises and organizations
Development banks
Other aid agencies
The main sources of project ideas are likely to be
policy reviews and development plans made by
government
Sectoral strategies and sub-sectoral programmes
Surveys conducted by local government and regional
organizations
Reviews of past projects
State enterprise, corporate, cooperative and private
sector plans
Investment identification missions by development
banks and donors
Study of new technological developments
 Drawing clues from consumption abroad
Bright ideas, etc
Profile of project Ideas
Profile of project ideas is a project concept note
containing major elements of a project. It should be
short and can sometimes be only a couple of pages.
Depending on the nature of the project, the profiles
need to contain all or part of the following basic
points. These are:-
1. Project title
2. Project location and owner of the Project
3. Background and Justification/Introduction
4. Development goal and objectives of the project
 Development/long–term objectives
 Immediate objectives
5. Description of the project
 Project components
 Project activities by component
 Target groups/direct beneficiaries
 Project inputs and outputs

6. Project costs and financing

• Crude project cost estimation
• Sources of finance

7. Project Benefits
Financial
Economic
Social
Environmental
Technological
8. Institutional Arrangement/ management
9. Duration of the project and outstanding issues