Project Prefeasibility and Feasibility Study Training

(April,2021)
by Dawit Yitagessu
0911881912
dawit55yita@gmail.com

1
 Training Program
No. Topic Day
1. Overview of development projects Day one Morning
2. Prefeasibility and feasibility study framework Day one Afternoon
3. Prefeasibility study objectives and components Day two Morning
4. Project idea identification for group discussion Day two Afternoon
5. Feasibility study objectives and components Day Three morning
6. Technical Analysis group discussion & Day Three Afternoon
presentation
7. Market analysis group discussion & presentation Day Four Morning
8. Financial Analysis- Briefing and Financial Day Four Afternoon
viability analysis techniques
9. Leal, administrative&Socio economic Analysis Day Five Morning
10. Environmental impact assessment overview Day Five Afternoon
 Session One: Climate setting
• Introduction
• Setting Norms
• Time management
• Reporters
• Energizing team
• Expectations

1
 Introduction
 Full Name
 Educational Background
 Work experience and current position
 What I like most…
 What I hate most ...
 What is your experience on project
management?
• What do you expect from this training
4
 Facilitator:
Dawit Yitagessu (MDM, MEC, BSc , PGDL)
Lecturer, Consultant and Trainer
Associate Consultant at Ethiopian Management Institute
And AACCSA
Manger, Geese Business & Development Management
Counseling Service
Email: dawit55yita@gmail.com
Cell phone number: 0911881912

5
Ground Rules

• How should we govern our

training?
• What are the Individual
duties and responsibilities?

1
 Training Norms
1. Safety precaution of the corona virus
2. Medium of communication
3. Mobile management
4. Respect other ideas
5. Punctuality and attendance
6. Active participation and openness
7. Avoiding side talk
8. Stick to the point of discussion
9. Energizing the class
10.Giving comments any time
• Time manager (s)
1.
2.

1
 Reporters
• Day 1=
• Day 2=
• Day 3=
• Day 4=
• Day 5=

1
• Team members
1. ......................
2. ......................

1
Expectations

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 Session Two:
Overview of project concepts
and project cycle management
 Session Objectives
After the end of the session participants will be able to

• understand the meaning of different concepts that are closely

related to development projects

• Define a project and its characteristics

• Discuss the basic similarities and differences of a project and a

program.

• Present the project cycle management and its major components

1
 ETHIOPIAN MANAGEMENT INSTITUTE MONITORING & EVALUATION

Concept of Development Project

Development is the process of positive change in
an entire social system so as to improve the
well being of human life.

It is a socio-economic transformation of society,

a movement from traditional way of thinking,
dealing with improving/transforming various issues
like health & education, and production to modern
methods and techniques.
 ETHIOPIAN MANAGEMENT INSTITUTE MONITORING & EVALUATION

2. Concept of Development Project

 In 1950’s and 1960’s development was
conceived in terms of growth targets such as
increase in per capita Gross National Product (
GNP) and Gross Domestic Product (GDP).

 These major indicators of development and

economic well-being do not give an indication of
how national income is actually distributed, and
indication on who is benefiting most from growth
of production.
 ETHIOPIAN MANAGEMENT INSTITUTE MONITORING & EVALUATION

2. Concept of Development Project

 During the 1970’s the concept of development had
been re-defined in terms of multidimensional
concepts such as:
a. human development indicators (HDI) or
b. Physical quality of life index [PQLI]
Consider like
Health – life expectancy, infant mortality rate - ratio of
deaths to population;
Education – literacy, school enrollment rate;
Income–equitable distribution of wealth;
reduction/elimination of poverty; reduction of inequality,
and; reduction/elimination of unemployment.
 Development policy
• It is a statement of intention or aspirations of
a government to improve the living standards
of its people.
• It is a comprehensive statement, which guides
the direction of general development
objectives or goals to be achieved at various
levels of intervention.
 Development strategy
• It is a general method of achieving specific
objectives.

• A development strategy is formulated following a

development policy that is already in place and
provides a long term perspective and framework for
achieving basic issues which are outlined in the
development policy.

• It also explains how resources will be organized and

the guiding principles that will apply for the
management of and use of those resources.
 ETHIOPIAN MANAGEMENT INSTITUTE MONITORING & EVALUATION

2. Concept of Development Project

A. National Development Policies: A government must have clear
policy statements. Example –
Reduction of poverty, illiteracy and disease.
B. Strategy: In the context of the policy direction, the chosen Strategies
for poverty reduction may be Enhancement of agricultural production;
increased social service expenditures; Expansion of employment
opportunities; Direct income transfer;
C. Legislation: Policies take effect through legislation which
establishes the institutional framework. Example:
Empowering the Ministry of Agriculture to take the necessary action.
D. Programs: Policies are implemented through programs that have
broadly expressed development objectives.
Example:
Policies - enhancing agricultural production;
Program- expand and diversify the output of the agricultural sector.
 National Development Planning & Projects

Dev’t plan Dev’t Strategies Dev’t goal

Progr Progr Progr

am 1 am 2 am 3

P P P
r r r
o o o Pr Pr
j j j oj oj Pr Pr
oj oj
e e e e ec ec ec
c c c ct t t1 t2
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1 2 3

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 What Is a Project?

• “A project is a temporary endeavor undertaken

to create a unique product or service”( PMI,
2013).

• A project is a series of activities aimed at

achieving specified objectives within a defined
time period and with a defined budget (EU,
2002)

21
 What is project?

• A project is an endeavor in which human,

material, and financial resources are organized in
a novel way, to undertake a unique scope of work,
of given specification, within constrains of cost
and time, following a standard life cycle, so as to
achieve beneficial change defined by objectives.

1
 What is project?

• A project is a unique set of coordinated

activities, with defined starting and finishing
points, undertaken by an individual or
organization to meet specific objectives
within a defined schedule, cost, and
performance parameters.

1
 Why a Project?

 A project is generally called upon to provide a

solution to a problem or to take advantage of an
opportunity.
 These needs might have to do with:
 Reducing costs
 Increasing revenues
 Eliminating waste
 Increasing productivity and efficiency
 Solving a business or functional problem
 Taking advantage of market opportunities
 Filling social needs; improving service to customers or
clients
 Why a Project?
 Responding to the activities of competitors
 Responding to external changes (e.g development of
new technology)
 Responding to government initiatives or new laws or
political consideration
 Resource availability – opportunity to make profitable
use of available resource, and
 Natural calamity – hedging against the adverse effects of
natural events as drought or floods
 Group Discussion

• Identify the major characteristics of a

project
• Take two projects from your experience
and discuss their differences
 Characteristics of projects
1. A project has a unique Purpose
2. A project is a one-time or temporary activity
3. A projects is unique activity and non- routine
4. A project has a definite beginning and end.
5. Projects have time, cost and quality constraints.
6. Project has a life cycle
7. Projects have a primary customer or sponsor.
8. A project involves uncertainty.

1
 The characteristics of a project
Items characterizes Specific issue
Uniqueness • Unique product /goods and services/
• Unique context
• Unique process

Duration • Temporary and limited timeframe

Numerous constraints • Quality, Time, Costs, Scope
Project life cycle • They emerge from need/demand/resource and finish
with the delivery of a satisfactory product or service

Involvement of multiple • Different interest

parties [stakeholders] • Different fields
• Different organizations
• Different culture

Context of relative • Environmental uncertainty [complexity,

uncertainty unpredictability]
• Technological uncertainty [size,]
• Resources uncertainty , number , complexity]
 Examples of projects …..
• Construction of dam for irrigation
• Constructing a building or facility
• Developing a new product or service
• Effecting a change in structure, staffing, or style
of an organization.
• Designing a new transportation vehicle
• Developing or acquiring a new or modified
information system
• Implementing a new business procedure or
process.
• Implementing different development community
projects (health, education, water and sanitation,
.)
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 Difference between projects
One project could be different from another in the following
respects:

1. Size and number of separate activities

2. Number of various skills, departments and people involved
3. Amount of time involved
4. Number of different activities involved
5. Amount of money involved
6. Impact on the organisation and customers
7. Control procedures
8. Communication procedures
 Types of projects
1. Experimental,
2. Pilot project,
3. Demonstration project and
4. Production project.
or
5. New project
6. Expansion project
7. Up dating project

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Project Cycle Management (PCM)

• Identify and discuss the life cycle of a

project?

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 Project cycle….
• The project cycle concept aims to emphasis two
main points:
– project development should pass through a
series of consecutive steps to help ensure that
projects are well planned, properly appraised,
adequately resources and efficiently
implemented; and that
– lessons learned during implementation should
be feedback into the planning process to
improve the design and implementation of
future initiatives.
1
 Stages of Project cycle (UNIDO Model)
Phase Stage
1. Identification
I. Pre-Investment 2. Preparation/formulation
 Pre-feasibility study
 Feasibility study
3. Appraisal/selection
5. Decision
1. Implementation
II. Investment  Tendering, Negotiating and Contracting
 Detailed Engineering Design
 Construction, Erection & Commissioning
2. Monitoring
3. Evaluation (on-going & terminal)

III. Operation 1. Operation

2. Ex-post evaluation
 Phases of the Project Cycle (World Bank)
1. Identification
2. Formulation/preparation/feasibility study
3. Appraisal
4. Implementation
5. Monitoring and Evaluation

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 The project cycle

Monitoring and
Identification
Evaluation

Implementation Formulation

Appraisal and
Financing decision
36
 Sources of Project Ideas

• We can distinguish two levels from where

project ideas are born at:
the micro-level and
 the macro-level.

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 Source…

1. At Micro-level
project ideas emanate from:
• unsatisfied demand or needs,
• existence of unused or underutilized natural or human
resources and the perception of opportunities for their
efficient use,
• The need to remove shortages in essential materials,
services or facilities that constrain development efforts,
• The initiatives of private or public enterprises in response to
incentives provided by the government,
• The necessity to complement or expand investments
previously undertaken,
• The desire of local groups or organizations to enhance their
economic status and improve their welfare,
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 Source ….

2. Macro-level:
Project ideas emerge from:
• National, sectoral, or regional plans and strategies
• Constraints in the development process
• A government’s decision to correct social and regional
inequalities or to satisfy basic needs of its people
• Unusual events such as droughts, flood, earthquakes,
hostilities, etc.
• A government’s decision to create local project
implementing capacity in such areas as construction, etc.
• Project ideas could also originate from foreign firms.
• Workshops and development experiences of other
countries
• Multilateral agencies or bilateral development
organizations
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Project Identification
The four key steps in project identification are:
1. Actual project identification - the generation of
project ideas by formal and informal institutions and
individuals.
2. Description of project idea- written description of
the project idea or concept, summarizing the main
elements of the proposed project to use in the
screening, ranking and prioritization of project ideas.
3. Screening - an initial review of project ideas and
concepts to see if they should be advanced or
abandoned at an early stage.
4. Prioritization- the ranking and selection of projects
against a set of criteria to identify the “best” projects to
move actively into the design stage and development.
 Group Discussion
• Identify project ideas from your
organization mandate or interest
perspective,
• Define or describe each project idea
• Conduct Screening ,use at least three
parameters to prioritize and ranking
• Present to the plenary for feedback
and sharing
Session Three:
Prefeasibility
Study/Analysis
 Session Objectives
After the end of the session participants will be able to

• Discuss the concept of prefeasibility and feasibility analysis

• Present the framework for prefeasibility & feasibility

analysis

• Explain the major issues to be considered during conducting

prefeasibility/feasibility analysis investment projects

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 Introduction
• This session is concerned with the methodologies
used in the selection and appraisal of investment
decisions in private and public sector
• Private investment projects aims to maximize
stakeholder's wealth /profit
• Public sector projects (funded by donors): should
have wider society or economic wide objective

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 Pre-feasibility study

•It is carried out to screen the promising

project ideas from other alternative
project ideas

•It is a preliminary study undertaken to

determine, analyze, and select the best
project scenarios.
 Pre-feasibility study

•In pre-feasibility we select the best idea among

several ideas. It will be hard and takes time if we
explore each scenario deeply.

•If the selected scenario is considered feasible, it is

recommended to continue the study to feasibility to
get deeper analysis of the selected project scenario.

•The completed written prefeasibility exercise report

is called Project Identification Brief or prefeasibility
report
Feasibility Study: The schematic diagram shown below gives

you good looking of your feasibility study .

Generation of ideas

Initial Screening

Is the idea promising?

Yes No
Plan Feasibility Analysis
Terminate

Conduct Market Conduct Technical

Analysis Analysis

Conduct Financial Analysis

Conduct Economic
Analysis
Conduct Ecological
Analysis

Is the project worthwhile?

Yes No

Prepare funding proposal

Terminate
Fig: Hierarchy of feasibility Study

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Criteria for Initial preliminary assessment

1. Urgency

2. Mandate/ Sector priority

3. Resource Availability for investment

4. Magnitude

5. Completeness/Inclusiveness
Pre-feasibility study ……checking the viability of the investment
project idea using the following checklists

1. Compatibility with promoter

2. Consistency with government
priorities
3. Availability of inputs
4. Adequacy of the market
5. Reasonableness of cost
6. Acceptability of risk level
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 Preliminary screening .......

• Compatibility with the Promoter

– It fits the Personality of the
Entrepreneur
– It is accessible to Him/her
– It offers him the Prospect of Rapid
Growth and High Return on the
Invested Capital

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 Preliminary screening ........

• consistency with the government priorities

– is the project consistent with the national goals
and priorities?
– are there any environmental effects contrary to
governmental regulations?
– can foreign exchange requirements of the
project be easily accommodated?
– will there be any difficulty in obtaining the
license of the project?

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 Preliminary screening ...............

• Availability of inputs
– are the capital requirements of the project within
manageable limits?
– can technical know-how required for the project
be obtained?
– are the raw material required for the project
available domestically at a reasonable cost?
– if the raw materials have to be imported, will
there be problems?
– is the power supply for the project reasonably
obtainable from external sources and captive
power resources 1
 Preliminary screening ..........

• Adequacy of Market
– Total present domestic market
– Competitors and their market share
– Export markets
– Sales and distribution system
– Projected increase in consumption
– Barriers to the entry of new units
– Economic, social and demographic trends
– Patent protection

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 Preliminary screening ..........

• Reasonableness of Cost
– Cost of material inputs
– Labour costs
– Factory overheads
– General administrative expenses
– Selling and distribution cost
– Service cost
– Economies of scale

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 Preliminary screening

• Acceptability of Risk Level

– Technological changes
– Competition from substitutes
– Competition from imports
– Governmental control over price and distribution
– Geographical vulnerability related to security and
other natural calamities

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 Group Discussion
• Conduct preliminary assessment or
prefeasibility study based on the six
criteria discussed above to check whether
your project ideas are promising or not
 Project Background
1. Background (Location, physical & socio-
economic characteristics,, other related
information)
2. Ownership background

3. Rationale of the project

4. Project objectives
5. Market (Demand & Supply) information

6. Description of the Business and result chain

 TECHNICAL AND PRODUCTION
• Process Flow/Operational Process
• Equipment, Furniture and Fixtures
• Building
• Technology/ machineries package
• Production capacity
• Land required
 Session Four:
Feasibility
Study/Analysis
 Learning Objective:
At the end of this session participants will
be able to:
• Distinguish market and demand,
technical, institutional, commercial
and socio-economical feasibility
analysis with their viability criteria
• Discuss major Environmental Impact
assessment
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 Feasibility study
• Follows viable identification and pre-feasibility
studies
• provide all data necessary for an investment
decision.
• is an analysis of the viability of an idea.
• focuses on helping answer the essential question of
“should we proceed with the proposed project
idea?”

1
 Reasons to do feasibility study
• A feasibility study:
– Give focus to the project and outline alternatives
– Narrow project alternatives
– Surface new opportunities through investigation
– Identify reasons not to proceed
– Enhance the probability of success by addressing and
mitigating factors early on that could affect the project
– Provide quality information for making decision
– Help to increase investment in the company
– Provide documentation that the project was thoroughly
investigated
– Help in securing funding from lending institutions and
other monetary sources.

1
 Feasibility studies….

• It is multidisciplinary activity involving

engineers, economists, and specialists in areas
such as agronomy, soils, geology, hydrology,
manufacturing processing etc
• feasibility studies are not always free from
vested interests

1
 Group Discussion
• What are the factors that affect the
feasibility of a project? (what aspect
of a project should be
checked/assessed….)

1
 Types of Feasibility studies
• There are seven important aspects of project feasibility study.
These are:-

1. Market and demand analysis

2. Technical feasibility

3. Institutional feasibility
4. Social feasibility

5. Financial (commercial profitability) analysis

6. Economic (national profitability) analysis

7. Environment Impact Analysis 1

 1. Market/demand Analysis
• In most cases, the first step in project
analysis is to estimate the potential size of
the market
• It addresses two broad issues:
1. What is the likely aggregate demand for
the product/service?
2. What share of the market will the project
enjoy?

1
 Demand analysis….

The key steps in demand and market analysis

are:

a) Situational analysis
b) Collection of secondary data
c) Characterization of the market
(description)
d) Demand forecasting (time series /causal
techniques)

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 Steps in DD and Market Analysis

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1
 Major Dimensions of the Demand & Market Analysis
• It should cover the following aspects:
1. General characteristics of the economy:
– Economic potential
– Production structure
– Foreign trade
– Economic policy
2. Product
– Characteristic features
– Substitutes and complementary goods  

1
 Major Dimensions of the Demand & Market Analysis
• It should cover the following aspects:
3. Demand
– Sales and orders
– Buyer's characteristics
– Demand determining factors
– Purchasing power
4. Supply
– Supply potential
– Local production
– Imports and exports
– Competitor's position
•  
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 DD analysis….
•  

5. Marketing environment (marketing strategy,

marketing mix)
– Price levels and tendencies
– Distribution channels
– Physical distribution network
– Promotion

6. Legal and political environment

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 Projections of Sales Revenue (Sales Forecasts)

• Sales are the quantity of a product that is actually

purchased at specific price and under specific
marketing strategy in a particular market at a given
point in time. 

• The projection of sales revenues is essentially an

extension of marketing research (initial demand
analysis) on the basis of which a project is developed
also in terms of specific sales volumes during
different periods after the project goes into
production. 

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 Projections of Sales Revenue (Sales Forecasts)

• Estimating sales revenue is an iterative process

that should also take into account the optional
plant capacity, appropriate technology, a
technically feasible production program and
alternative marketing strategies.

• The final determination of sales revenues may,

therefore, only be possible once technology
and plant capacity are more clearly known.

1
Sales forecast….

1
 Production program
• After projecting of sales during different
stages of production, a feasibility study should
define the detailed production program.
• A production program should define the levels
of output to be achieved during specified
periods

1
 Group Discussion
• Discuss the major issues considered in
conducting project technical analysis for the
following projects
1. Textile Factory (Group One)
2. Five Star Hotel (Group Two)
3. Printing Industry (Group Three)
4. Construction Company (Group Four)
 2. Technical analysis
• The following are some of the general technical
aspects that a project manger must be aware of:
2.1. Technology package
 Check all the required technologies & working
process clearly defined and explained
 Has the package been well researched and
field tested?
 What are the costs and benefits of alternative
package?
 Is the machinery or equipment appropriate to
the current situation?

1
 Cont’d ….

2.2. Location & land

 Where is the project location?

 Does the physical layout of the facilities pay adequate
attention to land use planning considerations?
 What is the optimum area to be covered by the project in
terms of resources management?
 What are the minimum catchment area?
 What is the scale of operations?
 Are there significant economies of scale? 1
 Cont’d….
2.3. Plant Capacity & technology
• Plant capacity refers to a volume or number of
units that can be manufactured during a given
period.
• Several factors have a bearing on the capacity
decision.
– Technological requirement
– Input constraints
– Investment costs
– Market conditions
– Resource of the firm
– Governmental policy

1
 3. Financial Analysis
• Relevance
 It is relevant only for commercial projects but
not for social service projects that provide public
goods that are provided “free”

 It is concerned with assessing the feasibility of a

new proposal for investment on the basis of
financial requirements and their availability.

 The project’s direct benefits and costs are

estimated at the prevailing market prices to
appraise the viability of the project as well as to
rank projects on the basis of profitability
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 Financial analysis (Cont’d …)

• To assess financial viability of a project, a

range of tools and methods can be used and
various types of financial statements can be
prepared.
• There are four kinds of statements that show
the financial situation of a project:
1. Resource flow statements
2. Fund flow statements for liquidity
3. Profit and loss statement
4. Balance sheet
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 I)Resource flow statement

• Investment cost

• Operating cost

• Working capital

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 Resource flow…

Initial Investment Cost estimate: This include

– Land and Site Development
– Buildings and Civil Works
– Plant and Machinery
– Technical know-how and engineering fees
– Miscellaneous Fixed Assets
– Pre-operative Expenses
– Provision for Contingencies

1
 Resource flow…
• Operating Costs
Fixed costs
Variable costs (such as material, power and
labour costs), etc.

• Working Capital Costs

 Physical stock needed for production to be
continues (initial stock of materials, work in
progress, final stock of output in stores and petty
cash at hand).
 Investment Cost Estimation
1. Land and Site Development

2. Buildings and Civil Works

3. Plant and Machinery

4. Technical know-how and engineering fees

5. Miscellaneous Fixed Assets

6. Pre-operative Expenses

7. Working capital
 B/Working Capital (Minimum Days of Coverage)
No. Type Days of Coverage
 1. Raw Material-Local 30 days
Spare Parts in Stock and
2. Maintenance 30days
 3. Work in Progress 10days
 4. Finished Products 15days
 5. Accounts Receivable 30days
 6. Cash in Hand 30days
 7. Accounts Payable 30days
 Fund source
1. Loan
2. Equity
3. Revolving
4. Grant
 Depreciation Rate
Building 5%

Machinery and equipment 10%

Office furniture 10%

Vehicles 20%
Pre-production
(amortization) 20%
 Revenue Projection
1. Production plan (Quantity for each year)
2. Forecasted operation period (Number of
years)

3. Estimated market selling price

4. Use 1-3 to project revenue for each year
 Operation Cost estimation/Projection
1. Labor cost
2. Material cost
3. Storage & Distribution cost
4. Transportation cost
5. Repair and maintenance cost
6. Utility cost
7. Other administration cost
8. etc…
 ii) Profit and Loss Statement (for profitability)

• Mainly this statement provides the financial

performance of a project during a fiscal or
accounting period (a year).
• It gives details of revenues to be earned and
costs to be incurred including expected gains
and losses in a financial year.
 Forecasted Income Statement (in birr)
For the Year Ended December Y1-Y5
Revenue: Y-1 Y-2 Y-3 Y-4 Y-5
Sales
Total Revenue
Costs and Expenses:
Material Cost
Labor Cost
Transportation Cost
Repair and Maintenance
Utility Expense
Advertising and Promotion
Insurance Expense
Supplies Expense
Other costs and Expenses
Rent Expense
Depreciation Expense
Interest Expense
Total Costs and Expenses
Income Before Tax
Less: Profit Tax
Net Income
 iii) Fund Flow Statement for Liquidity

• This type of project statement presents

 the sources (inflows) and
 application (outflow) of funds committed
to a project.
 Forecasted Cash Flow Statement Y1-Y5 (in birr)
Cash Inflows: Y-1 Y-2 Y-3 Y-4 Y5
Beginning Cash Balance
Sales
Depreciation Tax Shield
Borrow from Bank
Total Cash Inflows
Cash Outflows:
Material cost
Labor cost
Transportation cost
Repair and maintenance
Utility expense
Advertising and promotion
Insurance expense
Supplies expense
Rent expense
Other costs and expenses
Bank Loan Principal Repayment
Bank Loan Interest Repayment
Acquisition of fixed assets
Construction of buildings
Acquisition of Other Assets
Profit Tax
Dividend Payment
Total Cash Outflows
 iv) Balance Sheet for Business Worth

• The balance sheet for business worth is a

financial statement that gives the status of
directly productive investment undertaking.

• The common practice is to divide into:

a. assets that is what a project would own;
b. liability that is what a project would owe; and
c. net worth /capital that is what a project would
be worth.
 Forecasted Balance SheetY-1– Y-5(in birr)
ASSETS Y-1 Y-2 Y-3 Y-4 Y-5
Current Assets:
Cash on Hand
Stock
Total Current Assets
Fixed Assets:
Machineries
Buildings
Generator
Equipment
Other Assets
Total Fixed Assets
Total Assets
LIABILITIES AND
CAPITAL
Liabilities
Accounts Payable
Bank Loan
Total Liabilities
Capital:
Paid-up-Capital
Retained Earning
Total Capital
Total Liabilities and Capital
 Financial Evaluation Techniques
• Once the stream of costs and benefits for a project is
defined in the form of cash flows, the project’s
financial viability can be decided.
• Different techniques can be employed to examine the
financial viability of the project.
• However, the most common methods for evaluating
financial viability of a project are:
Non Discounting factor
1. Return on Investment or Simple Rate of Return
2. Payback Period
Discounting factor
3. Net Present Value
4. Internal Rate of Return
• Return on investment and pay-back period are the simple or
static methods since they do not take into consideration the
whole life span of the project but rely on one model period
(most frequently one year) or at best on a few periods.

• Their application is based on the project's annual data,

meaning that all the inflows and outflows enter the analysis
at their nominal non-discounted values as they appear at a
given time during the project's life.

• The net present value and internal rate of return are called
discounted or dynamic methods because they take into
consideration the entire life of a project and the time factor
by discounting the future inflows and outflows to their
present values
 i. Return on Investment
• Ratio of net profit in normal years to the initial
investment or equity.
• Selection criteria:
– ROI > the prevailing interest rate
– When comparing 2 or more than 2 projects, select
the one with the higher ROI

1
 ii. Payback Period

• The Payback period is the time taken to gain

a financial return equal to the initial
investment.

• Payback period = Initial Investment

Accumulated annual cash flows

100
 Example
• A project whose initial investment outlay is Birr
50,000 is expected to have a uniform annual
cash flow of Birr 10, 000 for 8 years. How many
years will be required to get back the initial
investment?

• Solution:
Payback period = 50,000
10,000
= 5 years
• Thus, the payback period is 5 years.

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 Payback period ….
Illustration 2:
 A company wishes to buy a new machine for a 4 -
year project.
 The manager has to choose between machine A
and machine B, so it is mutually exclusive solution.
 Although both machines have the same initial cost
(Birr 35,000) their cash flows perform differently
over the four-year period.

1
 Cash-Flow (Birr)
Year Machine A Machine B

0 (35,000) (35,000)
1 20,000 10,000
2 15,000 10,000
3 10,000 15,000
4 10,000 20,000
Payback period 2 years 3 years
1
 Incremental cash flow
Years 0 Y-1 Y-2 Y-3 Y-4 Y-5

Net
Income   188,431 235,056 293,650 359,011 454,007

Capital
Spending (800,000) 0 0 0 0 23,000

Total
Increment
al Cash
Flow (800,000) 188,431 235,056 293,650 359,011 454,007

Calculate the ROI & Payback period

 Group Reflection
Years 0 2010/2011 2012 2013 2014 2015
Net 324,100 428,512 552,806 687,816 833,776
Income

Total
Cash
Flow (1,500,000) 369,100 464,512 581,606 710,856 877,208
Discounting Methods

1
 Discounting methods
Concept of discounting / compounding
• Money has time value
• One birr received today is more than one birr
received in 2 years. Why?
1. If invested, can generate positive return
2. During inflation the future purchasing power
decreases

1
 Group Discussion
• Define and discuss the following
rates
1. Interest Rate
2. Discounting Rate
3. Opportunity cost of capital (Cost of
Debt and cost of equity)
 iii. Net Present Value (NPV)
• NPV is a measure of the value or worth added to the
company by carrying out the project.
• Is the present worth of cash flow streams generated
by an investment.
• Takes into account the fact that money values change
with time
• Value of money is affected by interest rates.
• NPV helps to take these factors into consideration.
• Shows you what your investment would have earned
in an alternative investment regime.

1
 NPV of Machine A

Column 1 Column 2 Column 3 = (2) x (3)

Years Cash Flow Discounting Present Value
Factor @20%
0 (35,000) 1 (35,000)
1 20,000 0.8333 16,666
2 15,000 0.6944 10,416
3 10,000 0.5787 5,787
4 10,000 0.4823 4,823
Total NPV 2,692
1
 NPV of machine B

Column 1 Column 2 Column 3 = (2) x (3)

Years Project Cash Discounting PV

Flow Factor @ 20%
0 (35,000) 1 (35,000)
1 10,000 0.8333 8,333
2 10,000 0.6944 6,944
3 15,000 0.5787 8,681
4 20,000 0.4823 9,646
Total NPV (1,396) 1
 NPV…

• Selection criterion for NPV:

– We accept all independent projects with NPV

greater than zero.
– For mutually exclusive projects, project with
higher NPV will be accepted.

1
 Group Discussion
• A project cost Birr 25,000 and it
generates cash inflows through a period
of five years Birr 9,000, Birr 8,000, Birr
7,000, Birr 6,000 and Birr 5,000, the
required rate of return is assumed to be
10%.
• Find out the Net Present Value of the
project.
 iv. Internal rate of Return
• The IRR is the return to the capital invested or
allocated or investment in the project.
• It is the discount rate that makes the present value of
cash inflows is equal to the present value of cash
outflows, i.e., NPV is zero. Helps measure the worth of
an investment
• Allows the firm to assess whether an investment in the
machine, etc. would yield a better return based on
internal standards of return
• Allows comparison of projects with different initial
outlays
• Set the cash flows to different discount rates

1
 IRR

• To get the IRR we will be looking for ‘r’ in the

above formula which makes NPV equals zero.
• However, the exact calculation of the IRR
requires some computation or trail and error
process or you can use software.
• IRR is the maximum interest rate a project could
pay for the resources used if the project is to
recover its investment and operating costs and
still break even.

1
 Steps in approximating the IRR
1. Choose two different discount rates, one leading
to a positive NPV, the other to a negative NPV.
2. Interpolation between these two NPV’s using the
formula.

1
 IRR = ri + (rh - ri) x NPV (ri)
/NPV (ri)/ + /NPV (rh)/

Where

ri = is a lower interest rate

rh = is a higher interest rate
NPV (ri) = is NPV calculated at lower interest rate
NPV (rh) = is NPV calculated at higher interest rate
/ / = is a symbol representing absolute value

1
 Example
• The first step consists of a trial and error process to
reach the IRR. That is in deciding the IRR; firstly,
we try with a discount rate and calculate the NPV.
• Secondly, if the NPV is negative, we have to try
with a lower discount rate because a lower
discount rate will increase the NPV.
• If the NPV is positive, on the other hand, we have
to try with a higher discount rate so that the NPV
will be reduced. Thus, we try with different
discount rates to reach the IRR.
• Once we have two discounting rate which one
gives a positive NPV and the other gives a
negative NPV we can use the above formula to
approximate the IRR value.
1
 IRR….

• Selection criterion for IRR

– We accept all independent projects having an IRR
equal or grater than the opportunity cost of
capital.
– For mutual exclusive projects, a project with
higher IRR is accepted.

1
Table : Machine A : Discount Factor 22 %
Column 1 Column 2 Column 3 = (2) x (3)
Years Cash Flow Discount Factor Present
22% Value
0 (35,000) 1 (35,000)
1 20,000 0.8197 16,394
2 15,000 0.6719 10,079
3 10,000 0.5507 5,507
4 10,000 0.4514 4,514
Total 1,494
NPV

1
Column 1 Column 2 Column 3 = (2) x (3)

Years Cash Flow Discount Present

Factor 24% Value
0 (35,000) 1 (35,000)
1 20,000 0.8065 16,130
2 15,000 0.6504 9,756
3 10,000 0.5245 5,245

4 10,000 0.423 4,230

NPV @ 24% 361

1
Column 1 Column 2 Column 3 = (2) x (3)
Years Cash Flow Discount Present
Factor 25% Value

0 (35,000) 1 (35,000)
1 20,000 0.80 16,000
2 15,000 0.64 9,600
3 10,000 0.512 5,120
4 10,000 0.4096 4,096
Total NPV (184)
1
The exact IRR can be computed using the
following formula.

IRR =ri + (rh - ri) x NPV (ri)

/NPV (ri)/ + /NPV (rh)/

= 0.24 + (0.25 – 0.24) x 361

/361/ + /-184/

= 0.24 + 3.61 = 0.2466 = 24.7%

545

Thus, the IRR is 24.7 %.

1
 Sensitivity Analysis
• Project planning starts by establishing
assumptions & conditions on which the
project is based
• They are generally based on inputs, outputs,
costs, prices, and revenues
• Since the planner cannot make assumptions
that will hold true with certainty, it is usual to
check what will happen if this base changes.
• This study of assumption under varied
assumptions is called sensitivity analysis
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 Sensitivity Analysis Examples…
• What will happen to our project if all costs are
increased by 10%?
• What will be the profitability of the project if
the price of one unit of output drops by 10%?
• What will be the net income of a farming project
if the output drops by 10% as an effect of bad
rains?
• All these changes will affect the revenues, the
costs, and the financial results of the project
directly or indirectly through other means

07/27/2022
 Group Discussion
• Calculate the non discounting and discounting
indicators and check the criteria for viability conclusion
• Conduct feasibility analysis by considering the
following assumptions
1. 10 % decrease in selling price
2. 10% increase in costs and expenses
3. Both 1 and 2
• Discuss the economic benefits of the project
(employment creation, value addition, FE-generation
& saving, integration (horizontal & vertical), etc..)
 4. Economic feasibility Analysis Highlight
• The economic analysis of development projects is
important whenever financial analysis fails to give a true
picture of economic impact of a project due to market
imperfection, external effects and government controls.

• In economic analysis, the basic assumption is that the

market prices do not reflect the real costs of inputs and
outputs to the national economy.

• Market prices, therefore, must be adjusted to reflect the

true value of goods and services to the economy.
1
 Key economic analysis steps
1. Set economic prices for our inputs
2. Set economic prices for our output
3. Change our revenue using output prices
4. Change the cost and expenses using input
prices
5. Develop the economic statement (Profit and
loss)
6. Conduct economic viability analysis using the
basic indicators (NPV, IRR)
 Cont…
• In financial analysis the goal is profitability to the
sponsor while in economic analysis the most
important question is whether or not the project
under examination is beneficial to the national
economy.

• Economic analysis can be used to provide

information on the impact of the project on key
economic variables such as GDP, investment,
employment, net foreign exchange earnings, income
distribution, international competitiveness, etc.
 Discuss the major areas of Economic Analysis
in your project
• Value addition
• Employment opportunity
• Foreign exchange generation (Export promotion)
• Foreign exchange saving (Import Substitution)
• Income distribution (Reducing inequality)

• Integration (vertical & horizontal)

• Increase international competitiveness
• technical know-how transfer 1
 5. Environmental Impact Analysis
• Is very important
• “Environmental Impact Assessment – EIA is a
systematic process that examines the environmental
consequences of development actions, in advance.”

Example:
 If a dam is to be constructed what are the
environmental effects on upstream and downstream
of the dam? How bad effects be mitigated?
 If insecticides, pesticides, etc are to be used in large
quantities in irrigation projects, what will be the
effects on fishing, farming?
 What is the effect of use of pills on health of
women?

1
 Aims of EIA

• To provide information to the public on a proposal;

• To formalise the consideration of alternatives to a

proposal being considered, in order that the least
environmentally harmful means of achieving the
given objective can be chosen;

• To improve the design of new developments and

safeguard the environment through the application
of mitigation and avoidance measures
 Issues considered during EIA
1. A clear understanding of the meaning of
sustainability;
2. Assessment of the potential
environmental impact of the project;
3. To suggest ways in which that impact
could be reduced at a reasonable cost;
4. To formulate mitigation strategies and
plan of action;
 EIA….
• EIA serves many purposes:
1.For The decision--‐maker It Informs The
Setting Of Environmental Terms And
Conditions For approving proposals.
2.For The Developer It Provides information
That Can Improve The Design Of The
Proposal And Ensure That Resources Are used
appropriately and efficiently.
3.For the residents it ensures that possible
negative impacts Are Considered And that
appropriate Measures for mitigating them are
identified.
1
 Group Discussion
• Discuss the major environmental impacts
of the sample projects discussed before
• Share practical experiences of projects
that affect the environment maybe due to
lack of EIA or lack of proper
implementation, M&E.

1
 6. Institutional feasibility Analysis

• Lack of management experience and ability is one of the

main difficulties standing in the way of development.
• However, many of the most common institutional
problems encountered when designing and
implementing projects have actually deeper root causes.
• Institutional assessment is a means of uncovering these
causes and proposing realistic project organizational sep-
up for its smooth implementation.
1
 Group Discussion
• Discuss the major issues or factors
to be considered during conducting
Institutional feasibility Analysis
 Factors of institutional feasibility study include:

• Sound internal organizational structure of the

project;
• Competent management and supervisory
personnel;
• Adequate technical and skilled personnel;
• Provision of any necessary training facilities;
 Factors of institutional feasibility study include:

• Effective channels of communication;

• Good relationship with contributing agencies;
• Realistic implementation schedules;
• If policy changes are necessary for the full
success of the project, whether and when they
are likely to be made;
 System Development

1. Organizational & Administration System

2. Leadership and Management
3. Office equipment and arrangement system
4. Communication System
5. Partnership and networking mechanisms
6. Procurement System
7. Financial Management System
8. Audit System
9. M&E System
10.System for Mainstreaming of Crosscutting issues
(Gender, environment, Disability, Health, etc)
141
142
143
 7. Project Sustainability Analysis

• Is carried out based on the belief that project

implementation should result in benefits
that have a lasting effect
• Inherent with sustainable development
approaches
• Acceptable with the existing norms and
values
• See the criterion….. next slide

07/27/2022
 Major criterion for Sustainable Project

 Low investment cost

 Adaptability to local skills
 Use of local raw materials
 Out put to meet the needs of the local people
 Import substitution & foreign exchange savings
 Creation of employment
 Profit generation
 Environmental harmony
 Continuity of production
 Supportive institutions
 Gender balance

07/27/2022
Sample Contents of Investment Project
Cover letter
Proposal Title
Executive Summary
1. Background and Project Description
1.1 Background
1.2 Description of the Business and Result Chain
2. Technical Analysis
3. Production Plan
4. Marketing Strategy
5. Management and Personnel
 Sample Contents of Investment Project
6. Financial Feasibility Study
6.1 Capital Investment
6.2 Financing Plan
6.3 Forecasted Income Statement
6.4 Forecasted Balance Sheet
6.5 Forecasted Cash-Flow
6.6 Investment Analysis
7.Sensitivity Analysis
8.Socio-Economic and Political Analysis
9.Conclusions and Recommendations
 Rehearsal Session
No. Rehearsal Topics Presenter
1

2
3

5
6

10
Thank you!

149