Project Chapter 3

By Mekonnen A.
PROJECT ANALYSIS &

MANAGEMENT
Chapter3:
Project preparation - Feasibility
Study
03/29/2024
Project preparation - Feasibility Study
2
 Is an in depth or detail investigation of development
 It tries to check viability of projects in terms of
 constraints
Deficiencies and
Potentials that the project intends to address
 The focus is on gathering , preparing and summarizing relevant

information about the proposals
This chapter covers the following topics:
 Market analysis
 Technical analysis
 Financial analysis and
 Economic analysis /social cost-benefit analysis
By Mekonnen A. 03/29/2024
Non-Numeric project selection models
 In the absence of detailed feasibility studies, project

implementing agencies usually use non- numeric
project selection models. However the use of these
models to project selection may be limited to projects
which do not involve huge investment of resources.
1. The sacred cow model
 Here, a project is usually suggested by a senior and
powerful individual in an organization and the idea is

then passed to the officers below. In many cases, other
officers are required to assist the boss to achieve what
he/she wants.
Non-Numeric …
4
2. Operating necessity model

 In this model, projects are initiated because they are
required to keep a system in the operation. These are

threatening situations such as floods which will simply
call for projects to be started without much evaluation.
3. Competitive necessity model
 Projects are usually initiated and given a lot of support if
they will help an organization maintain a competitive

edge over other organizations. Such projects are
considered to be of survival importance to an organization
Non-Numeric …
5
4. Product line extension model
 This model is used when a project is intended to develop and
distribute a new product or products. Usually, such project if

intended to fill a gap or to strengthen a weak link or to take
the organization to a new direction, will be judged favorably
without careful calculations of the profitability of the project.
5. Competitive benefit level
 This model is used where a firm has several projects that
must be considered and some ranking is given. In actual

practice, in this model, the projects are sorted out into three
categories; good, fair and poor. This is done according to
some development merit lists.
Market analysis
6
 In most circumstances, this is the first step in project analysis

 The objective is to determine
 the potential size of the market &
 the idea about the market share to capture
specifically, the objectives/activities of market and demand analysis in

preparing a project are to:
 Identify potential consumers or buyers.
 Gathering secondary and/or primary data/ information
 Market survey
 Market classification/characterization of the market demand forecasting
 Uncertainties in demand fore casting
 Market planning
Market…
7
Steps in Market Analysis
Step1. Situational Analysis and Specification of
Objectives
Situational Analysis
 The primary purpose is to generate enough data
about the market without formal study

 need informally, to talk to consumers or customers,
competitors, distributors, organizations, or other

similar or different producers or services providers
to understand preferences and purchasing power
Market…
8
Specification of Objectives
spell out its objective clearly and comprehensively.
Structuring the objectives in the formal questioning. Like
 who are the buyers?
What is the total current demand?
What price will customers be willing to pay?
How can potential customers be convinced?
What channel of distribution are most suitable?
What are the prospects of immediate sales? …
Market…
9
Step2. Collection of Secondary Information

Secondary sources are information gathered in some other
places or context and are already available.
Secondary Information may be obtained from central
statistics office, sample survey reports, planning reports,
academic studies, etc. Should be arranged in the form of
global to industry specific
This may provide starting point for market and demand
analysis. However, their reliability, relevance, and
accuracy for intended purpose should be carefully
examined.
Market…
10
Moreover, it provides leads and clues for gathering primary

information required for further analysis.
Evaluation of secondary information
Who gathered the information?
When was the information gathered? When published?
How representative the sample was?
How accurate, edited, tabulated and analyzed?
Step3. Conduct Market Survey

There are two Surveys; census survey and a sample survey
Market…
11 
The information sought in a market survey may relate to one or more of the
following:
 Total demand and rate of growth of demand,
 Demand in different segments of the market,
 Income and price elasticity of demand,
 Motives of seeking the product or service,
 Unsatisfied needs or demand,
 Purchasing power of customers,
 Satisfaction with the existing product or service,
 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.
Market…
12
Step4. Characterization of Market Survey

Based on the information collected, market could be
expressed as
A. There is effective demand in the past & present or not:
the starting point is the apparent consumption defined as:
production + import –export -∆ in stock level
Effective demand = apparent consumption in competitive
market
B. Break down of demand: the aggregate demand may be
broken down in to demand for different segments
Market…
13
C. Consumers or Customers:
Customers may be classified based on demographic (age, sex),
economic (income), sociological (profession, residence,
social background), attitude (preferences, intentions, habits,
attitudes, and responses).
D. Price:
It may be helpful to distinguish the following types of prices:
(i) Manufacturer’s price quoted as FOB (free on board) price
or CIF (cost, insurance, and freight) price, (ii) Landed price
for imported goods, (iii)Average whole sale price, and (IV)
Average retail price.
Market…
14
E. Methods of Distribution and Sales Promotion:
 The existing methods of distribution and sales promotion be
analyzed. This is essential to identify patterns of consumption

and problems encountered in making the proposed
product/service.
F. Supply and Competition:
 know the existing sources of supply and whether foreign or
domestic. For domestic, gather information related to: Location,

present production capacity, planned expansion, capacity
utilization level, bottlenecks in production, and cost structure.
 Competition from substitutes and near – substitutes be specified
as any product may be replaced by some other product as a result

of relative changes in price, quality, availability, promotional
effort, and so on
Market…
15
G. Government Policy:
This may influence the market and the demand for a
product/service.
Governmental plans, policies, and legislations be
disclosed. These are reflected in: production targets in
national plans, import and export trade controls, import
duties, export incentives, excise duties, sales tax,
industrial licensing preferential purchases, credit controls,
financial regulations, and subsidies /Penalties of various
kinds.

Market…
16
Step5. Demand Forecasting

After the completion of information gathering, it may be possible to estimate future
demand.
Methods:
1.Qualitative Methods
A. Jury of executive method
B. Delphi method
C. Consumer panel survey
2. Quantitative methods
II. Time Series Projection Methods
D. Exponential Smoothing method
E. Moving average method
F. Weighted Moving average
G. Trend projection
H. Simple regression Analysis
Market…
17
II. Casual Methods

A.Chain ratio method
B.Consumption level method
C.End use method
D.Leading indictor method
E.Econometric method
Jury of executive method

involves soliciting the opinions of a group of managers on
expected future sales and combining into sales estimate.
It is a speedy method for developing a demand forecast
Market…
18
Delphi Method
 This method involves eliciting the opinions of group
of experts, who don’t interact face – to – face, usually

with help of a mail survey, into a forecast through an
interactive process.
Consumer Panel Survey
 Under this method consumers are questioned about
their purchase plan in a consumer panel. The aim
of this method is to forecast product and service
demand on the basis of subjective judgment of
consumer purchase.
Market…
19
Exponential smoothing Method

forecasts are modified in the light of observed
errors. If the forecast value for year t, Ft, is less
than the actual value for year t, St, the forecast
for the year t + 1, Ft + 1, is set higher than Ft.
If Ft > St, Ft + 1 is set lower than Ft.
Moving Average Method
produced by averaging the values of a consecutive set of
data
A. Moving Averages
It attempts to forecast values on the basis of the average of the values of past few periods. Successive values are calculated
by considering the new values and dropping the old one.
20 Example:
The demand for A is observed for 10 months & it is given below.
Month Demand ( in unit)

1 420
2 380
3 456
4 412
5 429
6 366
7 392
8 440
9 452
10 396
Question:
What is the forecast for month 11 using a 3 month forecast & a 4 month
Forecast?
Yoseph A
Solution:
A three month moving average can be obtained by adding the demand during the past three
months & dividing the sum by three, with each passing month the recent month data is
added by dropping the old to get new forecast.
21
 By using three months moving average, the demand in month 11 will be 429 units.
396 + 452 +440 = 429 units
3
 when a four months moving average is used, the forecast of month 11 will be
420 units.
Which can be obtained as follows:

392 + 440 + 452 + 396 = 420 units
4
Yoseph A
B. Weighted moving average
Here we use similar logic like the previous , but we assign
22
weight to values in the given data.
Assume that the weight of the three months forecast given

above is 3:2:1 then,
Weighted moving average =
3x(440)+2x(452)+1x(396)
6
=436.6 units
Yoseph A
C. Trend Projections
In this method, a trend line is fitted to the given time series
23
data and then projections are made in to the future by
using this line.
Yoseph A
24
y = b x +a
w h e re
y = is t h e t re n d lin e t o b e p re d ic t e d
b = t h e slo p e o f t h e t re n d lin e
a – t h e y in t e rc e p t
x – in d e p e n d e n t v a ria b le (in t h is c a se t im e )
So fa r t h e t re n d lin e t h e v a lu e o f b & a c a n b e o b t a in e d a s fo llo w s
b=
 xiyi  n( x)( y)
 xi  n( x)
2 2
a = y  b(x)
Yoseph A
Consider the following demand pattern of ABC Company for iron ore.
Year Demand for iron sheet in ‘000 tons

1989 13
25
1990 17
1991 16
1992 16
1993 21
1994 20
1995 20
1996 23
1997 25
1998 24
1999 25
Required:
A. Forecast the demand of the iron sheet for the year 2000 for ABC Company.
Using 1994 as base year.
B. Forecast the demand of the iron sheet for the year 2000 for ABC Company.
Using 1997 as base year.
Yoseph A
Solution:
Here by using the square method we can develop the
26 estimating (regression) equation.
By using the least square method we can develop the line of
the best fit.
y = bx +a
The line of the best fit always pass through the two points
& i.e. ( X and Y bar,).
Now in order to develop the equation of the line we need to
have a base year to see the deviation of others from it.
Most of the time the base year is the middle observation.
In the case of even observations we use the mean of the
two middle observations as base year by multiplying the
mean by any number. for simplicity in calculation.
Yoseph A
A. Wh e n w e u se 1 9 9 4 a s a b a se y e a r.
Ye a r Xi Yi x iy i x i2
1 98 9 -5 13 -6 5 25
1 99 0 -4 17 -6 8 16
27
1 99 1 -3 16 -4 8 19
1 99 2 -2 16 -3 2 4
1 99 3 -1 21 -2 1 1
1 99 4 0 20 0 0
1 99 5 1 20 20 1
1 99 6 2 23 46 4
1 99 7 3 25 75 9
1 99 8 4 24 96 16
1 99 9 5 25 1 25 25
xi = 0 y i = 2 2 0 xiy i = 1 2 8  xi2 = 1 1 0
Th e e q u a t io n o f t h e e st im a t in g lin e ,
Wh e n t h e b a se y e a r is 1 9 9 4  x = 0 . Th e v a lu e o f b & a fo r t re n d lin e c a n b e
o b t a in e d a s fo llo w s:
Yoseph A
b = 128 –11(0)(20) = 128 =1.1636
110 – 11(0)2 110
a = y – b( x )
28
20 – 1.1636(0) = 20
(y = bx + a)
The trend linear equation will be;
y= 1.1636x + 20
Therefore, the forecast for the year 2000 will be as follows;
x= 6 (because it is six years after the base year 1994
y= 1.1636(6) + 20
y= 26.9816 tons of iron sheet
Yoseph A
B) if w e t a ke 1 9 9 7 a s a b a se y e a r
Ye a r Xi Yi xiy i xi2
1 98 9 -8 13 -1 0 4 64
29 1 99 0 -7 17 -1 1 9 49
1 99 1 -6 16 -9 6 36
1 99 2 -5 16 -8 0 25
1 99 3 -4 21 -8 4 16
1 99 4 -3 20 -6 0 9
1 99 5 -2 20 -4 0 4
1 99 6 -1 23 -2 3 2
1 99 7 0 25 0 0
1 99 8 1 24 24 1
1 99 9 2 25 50 4
xi = -3 3 y i = 2 2 0 xiy i = -5 3 2  xi2 = 2 0 9
x = xi = -3 3 = -3
n 11
y = y i = 2 20 = 20
n 11
Yoseph A
b= -532 –(11)(-3)(20) = 128 = 1.1636
209 – 11(-3)2 110
a = y – b( x )
30
= 20-1.1636(-3)
= 23.4908
Then the equation will be
y = 1.1636x+23.4908
the forecast for the year 2000 will be ;
x =3 (because it is 3 yrs. after the base year -1997)
y =1.1636(3)+23.4908
26.9816 tons of iron sheet.
N.B. The forecast for the year 2000 will be the same even if the base
year is changed i.e. irrespective of the base year the forecast will be
the same.
Whenever there is a change in the base year, there is no need of
calculating the slope of the equation. We need to calculate the y –
intercept only & we can use the slope calculated in the previous base
year as it is. Yoseph A
Causal Models of Forecasting
The causal model considers two types of variables the
31
dependent and independent variables. E.g., the sales of a
company is depend on & is related to the price changed.
 By using regression analysis it is possible to develop a
statistical relation ship b/n the dependent and independent
variables.
Simple regression analysis;
 It is used when there is one independent variable/
explanatory variable. Here an estimate of the dependent
variable is made corresponding to a given value of the
independent variable by putting their relationship in the
form of regression line.
Yoseph A
The regression line is then represented by the following
equation.
32
y = a +bx where,
a- intersect of the regression line
b-slope of the regression line
x- the independent variable
y-the predicted value of the dependent variable
b= ∑xy – n x y
∑x 2 - n x2
a= y–bx
Here parameter b is also called the regression
coefficient.
Yoseph A
b= ∑xy – n x y
∑x 2 - n x2
33
a= y–bx
Where:
∑y – Summation of the value of the dependent variable
∑x – Summation of the value of the independent
variable
∑xy – Summation of moderate of x and corresponding y
value
∑x2 – Sum of the square of the value of the independent
variable
n-Number of date points
Yoseph A
Illustration on Regression analysis
Consider a large firm organization engaged in producing barely. The organization feels that the demand
for its product (barely) is dependent or related to the number. of cans of beer of liter consumed every
34
year in a certain locality. To establish the demand forecast for its product, the organization has
collected the following historical data of hectares of land that had been sawn & the number. of quintals
of barely harvested.
Year Consumption of beer in ‘000 of liters Demand for barely in ‘000 of quintals
1990 36 54
1991 26 30
1992 12 28
1993 40 48
1994 24 36
1995 18 30
1996 30 38
1997 30 46
1998 14 16
1999 34 42
Required:
If the numbers of liters of beer to be consumed in the coming period is 48000 litters (orders already
received from clients). Forecast the number of quintals of Yoseph
barely thAat could be demanded in the year
2000.
So lu tio n :
Th e first st e p is re g re ssio n a n a ly sis is t o id e n t it y t h e d e p e n d e n t a n d in d e p e n d e n t

v a ria b le s u su a lly d e n o t e d b y x a n d y re sp e c tiv e ly . In t h is illu st ra t io n t h e d e p e n d e n t
v a ria b le is b a re ly a n d t h e in d e p e n d e n t v a ria b le is b e e r.
35
Be e r ( x ) Ba re ly ( y ) x2 xy
36 54 1 29 6 1 94 4
26 30 6 76 7 80
12 28 1 44 3 36
40 48 1 60 0 1 12 0
24 36 5 76 8 64
18 30 3 24 5 40
30 38 9 00 1 14 0
30 46 9 00 1 38 0
14 16 1 96 2 24
34 42 1 15 6 1 42 4
? xi = 2 6 4 ? yi = 36 8 ? xi = 7 7 6 8 ? yi = 10 55 6
x = ? x = 26 4 = 2 6 .4
n 10
y = ? y = 36 8 = 3 6 .8
n 10
b = 1 0 5 5 6 – 1 0 (2 6 . 4 ) ( 3 6 .8 ) = 8 4 0 .8 = 1 .0 5
7 7 6 8 – 1 0 (2 6 . 4 ) 2 7 9 8 .4
a = 3 6 . 8 – (1 . 0 5 ) (2 6 . 4 ) = 9 .0 8
? y = 1 .0 5 x + 9 .0 8
Yoseph A
36
y = 1.05x + 9.08
The demand for barely in the year 2000 :
= 1.05 (48000) + 9.08
= 50.4 tons of quintals.
Yoseph A
Market…
37
Chain Ratio Method

 the potential sales of a product may be estimated by
applying a series of factors to a measure of aggregate

demand
its reliability is critically dependent on the ratios and
rates of usage used in the process of determining the
sales potential
Consumption Level Method
 considers the level of consumption, using standard and
defined coefficients, and can be usefully adopted for

consumer products.
Market…
38
Income Elasticity of Demand

 The extent to which demand changes in response to variations in
income is measured by the income elasticity of demand.

 E = Q – Q × I1 + I2
1 2 1
I2 – I1 Q2 + Q1
 E1 = Income elasticity of demand

 Q1 = quantity demanded in the base year
 Q2 = quantity demanded in the following year
 I1 = income level in the base year
 I2 = income level in the following year
Market…
39
Price Elasticity of Demand

It is the ratio of relative variations in the volume of demand to the
relative variation in price, may be expressed as follows:
Ep = Q2 – Q 1 × P1 + P2
P2 – P1 Q2 + Q1
 Where Ep = Price elasticity of demand

 Q1 = quantity demanded in the base year
 Q2 = quantity demanded in the following year
 P1 = price per unit in the base year
 P2 = Price per unit in the following year
Market…
40
End – Use Method

 End – use method utilizes consumption coefficients,
and is therefore, also called the consumption

coefficient method, involves the following steps:
Identify the possible uses of the product.
Define the consumption coefficient of the product for
various uses.
Project the output levels for the consuming industries.
Derive the demand for the product.
Market…
41
Leading Indicator Method

 Leading indicators are variables which change a
head of other variables, the lagging variables.

Thus, observed changes in leading indicators may
be used to predict the changes in lagging variables.
 two basic steps involved are: (i) identify the
appropriate leading indicator (s). (ii) establish the

relationship between the leading indicator (s) and
the variable to the forecast
Market…
42
Econometric Method
 An econometric model is all about a mathematical
representation of economic relationship (s) derived

from economic theory.
Step6. Market Planning
The prime purpose is meeting the customer needs
better than their competitors.
The marketing plan should focus on customer needs,
nature of product or service offering, channel function
and coverage.
Market…
43
It should be targeted on the following:

 Customer; consider core needs and ancillary
needs.
 Distribution; indicate role of distributors, whole
sellers and retailers

 Promotion; which includes advertising, branding,
own sale efforts.

 Pricing; indicate final price to customers, trade
margins, duties on the intended price.

Market…
44
 Services; state warranties, after – sale service,
training, installation, etc
 Market segmentation; breakdown markets into
meaningful groupings or segments giving emphasis

on distinguished characteristics, size of segment,
accessibility, and degree of competition.
7. Uncertainties of demand
Demand forecasts are subjected to errors and
uncertainties which may arises from three sources:
Market…
45
 A. data about the past and present

 B. method of forecasting
 C. environmental changes
A. data about past
 Data may be vitiated by the following inadequacies of data
 lack of standardization: data may not reflect uniform
concept and measures for products, price, quantity, cost and

income
 few observation: the observations may not be enough
 influence of abnormal factors: wars and natural calamities
Market…
46
B. Method of forecasting
Methods used are characterized by the following
limitations
 Inability to handle un quantifiable factors
 Unrealistic assumptions: each method is based on
some assumption which may not be fully realistic

 Excessive data requirement: the more advanced the
method the greater the data requirement
Market…
47
C. Environmental changes:
changes like technology, shift in government policy, discovery
of new source of raw materials etc
Coping with the uncertainties
 Conduct analysis based on uniform and standard definitions
 Ignore the abnormal or out-of-the-ordinary observations
 Adjust in light of unquantifiable significant influences
 Monitor the environment imaginatively
 Evaluate the assumption use the appropriate one
 Consider likely alternative scenarios and their impacts

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By Mekonnen A.

PROJECT ANALYSIS &

Potentials that the project intends to address

 The focus is on gathering , preparing and summarizing relevant

 Financial analysis and

 Economic analysis /social cost-benefit analysis

 In the absence of detailed feasibility studies, project

powerful individual in an organization and the idea is

2. Operating necessity model

required to keep a system in the operation. These are

they will help an organization maintain a competitive

distribute a new product or products. Usually, such project if

must be considered and some ranking is given. In actual

 In most circumstances, this is the first step in project analysis

 the potential size of the market &

 the idea about the market share to capture

specifically, the objectives/activities of market and demand analysis in

 Gathering secondary and/or primary data/ information

 Market classification/characterization of the market demand forecasting

 Uncertainties in demand fore casting

about the market without formal study

competitors, distributors, organizations, or other

What is the total current demand?

What price will customers be willing to pay?

How can potential customers be convinced?

What channel of distribution are most suitable?

What are the prospects of immediate sales? …

Step2. Collection of Secondary Information

Moreover, it provides leads and clues for gathering primary

When was the information gathered? When published?

How representative the sample was?

How accurate, edited, tabulated and analyzed?

Step3. Conduct Market Survey

 Demand in different segments of the market,

 Income and price elasticity of demand,

 Motives of seeking the product or service,

 Unsatisfied needs or demand,

 Purchasing power of customers,

 Satisfaction with the existing product or service,

 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

Step4. Characterization of Market Survey

analyzed. This is essential to identify patterns of consumption

domestic. For domestic, gather information related to: Location,

as any product may be replaced by some other product as a result

Step5. Demand Forecasting

C. Consumer panel survey

E. Moving average method

F. Weighted Moving average

H. Simple regression Analysis

II. Casual Methods

B.Consumption level method

C.End use method

D.Leading indictor method

Jury of executive method

of experts, who don’t interact face – to – face, usually

Exponential smoothing Method

Month Demand ( in unit)

Which can be obtained as follows:

Assume that the weight of the three months forecast given

So fa r t h e t re n d lin e t h e v a lu e o f b & a c a n b e o b t a in e d a s fo llo w s