UNIT 2

Project Identifications
Project Feasibility Studies
Market & Demand Analysis
Technical Analysis
Project Cost Estimates
Financial Appraisal

Project Management Framework 1

Project Identification
 Project Identification and selection is a process to assess each
project idea and select the project with the highest priority
 The first and one of the critical steps in the project cycle
management is the identification and selection process. This is an
important stage such that it can affect the whole process including
that of sustainability of the project after completion and
transferring to operational phase. However, this stage is
overlooked in some cases particularly in the process of capturing
the actual needs of the beneficiaries.
 The purpose of project identification is to develop a preliminary
proposal for the most appropriate set of interventions and course
of action, within specific time and budget frames, to address a
specific development goal in a particular region or setting.
Investment ideas can arise from many sources and contexts

Project Management Framework 2

Feasibility Studies:
Because the process of development can be costly, the systems
investigation stage typically requires the development of a feasibility
study. At this stage, this is a preliminary study where the information
needs of prospective users and the resource requirements, costs,
benefits, and feasibility of a proposed project are determined. A team of
business professionals and IS specialists might then formalize the
findings of this study in a written report that includes preliminary
specifications and a developmental plan for a proposed business
application. If the management of the company approves the
recommendations of the feasibility study, the development process can
continue.
During the Economic Feasibility Studies, we conduct Cost-benefit
analysis to measure the tangible and Intangible benefit by developing
the Application System.
 MARKET & DEMAND ANALYSIS

The exercise of project appraisal often begins with an estimation of

the size of the market. Before a detailed study of a project is
undertaken, it is necessary to know, at least roughly, the size of the
market because the viability of the project depends critically on
whether the anticipated level of sales exceeds a certain volume. Many
a project has been abandoned because preliminary appraisal revealed a
market of inadequate size.
Market and demand analysis is carried out to identify the
aggregate demand for a product or service and the market share a
project under consideration is expected deliver.

Project Management Framework 5

 Technical Analysis
 Technical analysis in project management is the study of the
aspects of the project in order to evaluate the technical and
engineering aspects of a project at a stage when the project is in
examination stage, analysed and formulated.
 However, Technical Analysis seems to be a continuous process in
the project management system which determines the prerequisites
for meaningful commissioning and establishment of the project.
Purpose of Technical Analysis
 The primary purpose of conducting technical analysis is to find out
the technical feasibility of the project. It’s done to know whether
all the inputs required to set up the project are available or not.
 In order to find out the most suitable and optimal structure of the
project in terms of technology, location etc.
 Deciding from all available alternatives which will be the best
option for the organisation.
Project Management Framework 6
Components of Technical Analysis
1. Choice of Technology/Manufacturing Process:
2. Technical Arrangements:
3. Material Inputs and Utilities:
5. Plant Capacity or Production Capacity:
6. Location and Site:
7. Machinery and Equipment:
8. Environmental Aspects:

Project Management Framework 7

 Project Cost Estimates
 In the field of project management, cost estimation is the process of
estimating all of the costs associated with completing a project
within scope and according to its timeline.
 Initial, high-level estimates are often used in the earliest stages
of project planning and can determine whether or not a project is
ultimately pursued. Once a project is approved and an organization
chooses to move forward with it, more detailed and granular cost
estimates become necessary in order to appropriately allocate
various resources.

Project Management Framework 8

Project Cost Estimation Techniques
 Analogous Estimating
 Parametric Estimating
 Bottom-Up Estimating
 Three-Point Estimating

Through analogous estimating, a project manager calculates the

expected costs of a project-based upon the known costs associated
with a similar project that was completed in the past. This method of
estimation relies upon a combination of historical data and expert
judgment of the project manager.

Project Management Framework 9

Parametric Estimating
In parametric estimating, historical data and statistical modeling are
used to assign a dollar value to certain project costs. This approach
determines the underlying unit cost for a particular component of a
project and then sales that unit cost as appropriate. It is much more
accurate than analogous estimating but requires more initial data to
accurately assess costs.
Bottom-Up Estimating
In bottom-up estimating, a larger project is broken down into a
number of smaller components. The project manager then
estimates costs specifically for each of these smaller work
packages. For example, if a project includes work that will be split
between multiple departments within an organization, costs
might be split out by department. Once all costs have been
estimated, they are tallied into a single larger cost estimate for the
project as a whole.
Project Management Framework 10
 Three Point Estimating ( PERT)
Used where there is uncertainty in the duration of estimates

PERT used “weighted Average “ to calculate the project duration.

Weighted Average or Expected Cost is based on three points estimates.

Three points estimates includes Optimistic (O), Pessimistic (P)and Most

likely (M).
The resulting estimates are stated in the range of Plus(+) and Minus(-)
estimate.
Applies percentage confidence to complete a project within a given range of
estimates.

Beta Distribution (from the traditional PERT technique).

cE = (cO + 4cM + cP) / 6

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 Differences Between Estimates and Budgets
An estimate comes first and is generally a broad, big picture total
sum used in cost/benefit analysis and strategic decision making
prior to committing to a course of action.
A budget is developed after the decision to commit is made and is
generally far more detailed, broken into time periods and used to
empower, control and account for operational decisions made
during the actual implementation of the strategic decision.

The totals from the budget should still match the estimated totals
approved by the strategic decision makers. As u see it, an estimate
is used to make the decision about a destination, but a budget
provides the detailed road map on how to get there. So you will
generally need both because they are each prepared and presented
for different purposes.
Your estimate should be as close to the final budget as possible,
but this comes with experience and expertise
Project Cost Management 12
 Determine Budget
A Project Budget is the total amount of monetary resources that are
allocated for particular goals and objectives of the project for a specific
period of time. The purpose of project budget management is to estimate
and control project costs within the approved budget and to achieve the
stated goals of the project

Determine Budget is the process of aggregating the estimated costs of

individual activities or work packages to establish an authorized cost
baseline. The key benefit of this process is that it determines the cost
baseline against which project performance can be monitored and
controlled .

Having a thorough budget the project manager can make better decisions
regarding the constraints (time, cost and scope) to successfully complete
the project while satisfying stakeholders’ needs and understanding the
implications on the PM schedule and resource allocation.
Project Cost Management 13
 Budgeting Approaches

There are two main approaches you can take when creating a
budget:
Top-down approach: deciding how much the project will cost
and dividing the amount between the work packages.
Bottom-up approach: estimating the total cost of the project
by costing the lowest-level work packages and rolling up.

The team, often involving the final budget holder, identify the
tasks and activities needed to complete the project. The project
is based on the lowest-level work packages and rolled up to
arrive at the total project cost. The direct and indirect costs are
calculated for each work package.

Project Cost Management 14

Components of Project Budget

Project Cost Management 15

Cost Baseline , Expenditure and Funding Requirements

Project Cost Management 16

 Project Financial Appraisal
A financial appraisal of a project proposal considers the potential rewards of
carrying out the project against the predicted costs. The evaluation will depend
on; the size of the project and the time-span over which the costs and benefits are
going to be spread. The Financial Appraisal demonstrates- methods for analyzing
and evaluating a range of financial accounting methods and other commercial
data to enable the Managers to assess the potential risks and returns of the
projects and to make preliminary recommendations on whether or not to advance
funds.
It helps to take a Judicious decision – how much to invest/where to invest/when
to invest in each sector of economy to achieve highest growth of economy. All
sectors are required to be developed at minimum cost while achieving highest
overall economic growth.
Two Categories of Investment Criteria are used :
i. Non- Discounting Cash Flow Methods : Time value of money is not used.
i. Pay Back Period
ii. Average Rate of Return
ii. Discounting Cash Flow Methods (DCF method): Time value of money is
considered.
i. NPV(Net Present Value)
ii. IRR( Internal Rate of Return)
iii. BCR( Benefit Cost ratio)
Payback Period

 Payback period is the number of periods for the sum

of project’s expected Cash Flows to equal its initial
cash outlay.
 Payback period is the time it takes to recover its
initial investment.
 A project is acceptable if the payback period is
shorter than or equal to CUT-OFF period.
Accounting Rate of Return / Average Rate of Return

It’s the rate of profit to Capital Invested

It’s calculated by dividing the average profit with the average
investment

ARR = Average Profit After Tax / Average Investment x 100

Note : If ARR is higher than the minimum rate of return

established by the management then the project is accepted
otherwise rejected
Net Present Value ( NPV)
 It’s the most popular method of evaluating the Project
investment proposal.
 It’s calculated by subtracting the Present value (PV) of cash
outflow from PV of cash in flow

Present Value: Compare the value of Future cash flows to Today’s

Dollars(Currencies)

PV = FV / (1 + r)n

NPV = PV of cash inflow - PV of cash outflow

 It’s most reliable method under normal circumstances , it uses

cash profit to evaluate the proposals.
 Investment to be undertaken if its NPV is positive and should be
rejected if NPV is negative
 Internal Rate of Return(IRR)

 IRR is the discount rate that makes the Net Present Value
(NPV) of the Project EQUAL to ZERO.
 An investment to be accepted if its IRR is higher than its Cost
of Capital and should be rejected, if lower.
 IRR can be interpreted as a measure of profitability of its
expected cash flows.
 IRR takes into account Time Value of money and risk of
investment
Benefit Cost Ratio (BCR ) / Profitability Index(PI) /
Desirability Index (DI).

 It’s the Rate of PV of cash inflow to the PV of cash outflow.

 It’s gives results in time

BCR/ PI = PV of Cash Inflow / PV of Cash Outflow

PI = 1 Uncertainty
PI > 1 Accept
PI < 1 Reject
Limitations of Financial appraisal
The concept of ‘Financial appraisal’ works completely fine in a
world where there is a well-defined benefit for a well-defined
investment. Although, reality is not always that simple. A
quantitative and conventional approach is particularly
problematic where:
 There is no guaranteed return
 The benefit is made in terms of reduction of labour
 The project is considered to be strategic in nature – e.g. a new
computer system being installed in a company, resulting in a
speed up of the transfer of information and a more integrated
organization – this will be challenging to show as a cash
return.
 The organization is a non-profit sector – e.g. government or
charity

Project Management Framework 23

Example : 1

Suppose we have Cash Inflow = 3,00000

Cash Outflow = 2,00000

NPV = ? PI = ?

1,00000 1.5

Example : 2

Suppose we have Cash Inflow = 10,00000

Cash Outflow = 8,00000

NPV = ? PI = ?

2,00000 1.25

Case is recommended