project mangement

1. UNIT - IV
PROJECT PREPARATION
4.1. Markets , Demand Analysis ; 4.2. Raw Materials and Supplies
4.3. Environment Impact Assessment (EIA)
4.4. Production Program and Plant Capacity
4.5. Technology Selection
4.6. Organizational and Human Resource
4.7. Financial and Economic Analysis
4.7.1. Initial investment cost , 4.7.2. Production cost
4.7.3. Marketing cost ; 4.7.4. Projection of cash flow
4.7.5. Financial evaluation
4.7.5.1. Net present value (NPV) ; 4.7.5.2. Internal rate of return (IRR)
4.7.5.3. Benefit cost ratio (BCR)
4.7.5.4. Payback period (PBP)
4.7.5.5. Accounting rate of return (ARR)
4.7.5.6. Break – even analysis (BEA)

2. Consequences of Poor Project Preparation
• The following points has shown that the consequence of
poor project preparation too many industrial projects suffer
in terms of:
• Low capacity utilization
• Heavy costs overruns
• Deteriorated / declined financial profitability
• Lingering (Slow ) illness or the sudden death syndrome (
condition )
• Overestimated/ miscalculated returns / profit
• Underestimated / under valued costs
• Omission of a necessary component
• Optimistic projection (Yield, date)
• Failure to consider the project related climate changes
• Optimistic calendar for implementation

3. Steps in Project analysis
First step :
Identifying the demand for the product
Identifying possible
Final step :
• Analysis towards determining the plant capacity taking
into account alternative levels of production
• Analysis towards Investment outlays and sales
revenue.
• The extensive and careful analysis of past, present and
future demand for the product and market
• Institutional and political forces influencing demand
and sales of the product.

4. Responsibilities of Project analyst
• A feasibility study should arrive definitive conclusions on all the basic
aspects of a project after considering various alternatives.
• The objective of feasibility study is to provide a final investment decision.
Therefore it should define all project features as precisely as possible.
• A feasibility study should be detailed and precise enough to enable
decisions.
• The description of the project components should be refined to use the
study as a guide for project implementation.
• The discussions and analysis required with engineers, economists, and
specialists in areas such as soils, geology, manufacturing, processing,
extension and management to make project more effective.
• There should have a sharp eye on the crucial aspects of a feasibility
study.

5. Feasibility study
• Estimation of size of the project
• Structure and development trends of demand for the product or
products,
• Careful analysis of determining variables of Project and their
market environment
• Demand forecasting and the ultimate goal of the procedures
towards project
• Sales volume and revenue projections.
• Detailed production program
• Various production process and their time limit.
• Production program
• Plant capacity
• Material and inputs choice
• Location
• Financial evaluation
• Ultimate marketing strategy

6. Important key areas of Market and demand analysis
1. General Characteristics
of the Economy:
 Economic prospective
 Production structure
 Foreign trade
 Economic policy
2. Product
 Characteristic features
 Substitutes and
complementary goods
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
5. Marketing environment
(marketing strategy, marketing
mix)
 Price levels and trends
 Distribution channels
 Physical distribution
network
 Promotion
6. Legal and political
environment

7. Important key areas of Market and demand analysis
- Market Segmentation
• Religion
• Nationality
• Social class
• Culture
3. Personality and behavior:
• Life – style
• Leadership
• Ambition
• Buying motive
• Service sensitivity
• Promotional sensitivity
1. Geographic:
• Administrative regions
• Geographic regions
• Climate
• City – size
• Rural district – size
2. Socio – Economic:
• Income
• Age
• Sex
• Occupation
• Education
• Family size

8. Key steps in Market and Demand Analysis
• Situational analysis
• Collection of secondary information
• Conduct of market survey (primary information)
• Description of the market
• Demand forecasting
• Market planning

9. Role of Market Analyst
Market research is a special stage in the feasibility study. Market
research usually ranks top in the sequence of the core chapters of a
feasibility study. The following aspects should be concentrated at the
time of market research :
• Capacity planning,
• Technology selection,
• Staffing the sales,
• Promotion and service department
• Working capital and
• Financial planning
• Revision of sales and demand forecasting
• Projection of future demand
• Behavior of customers , taste

10. It deals with the following :
market
market conditions
customer
supplier
product
service
demand
supply
elasticity of demand
price elasticity , Promotion , placement , pricing , production
and etc.,
I. MARKET AND DEMAND ANALYSIS

11. II. RAM MATERIAL AND SUPPLY STUDY
Raw material and supply study deals with the
following :
• Identifying the good quality of raw material
• Procuring the raw material
• Safeguarding raw material
• Reduction of production cost
• Reduction of distribution cost
• Effective utilization of Raw material and its
distribution channels
• Reduction of abnormal Wastages

12. III. LOCATION , SITE AND ENVIRONMENT IMPACT ASSESSMENT ( EIA )
It is concerned with Site or location Selection
• Identifying the correct and appropriate site
• Evaluation of the standards of the site
• Evaluation towards the cost of the land
• Analyzing the surrounding environment
• Analyzing the facilities available nearby the site or location
• Facilities like water, hospitals , hotel or restaurants , educational
institution
• Workers Availability
• Population size and other parameters
• Availability of the land
• Soil and Quality of the land
• Suitability of the land with the current project
• How the local environment creates an impact on current project

13. IV. PRODUCTION PROGRAM AND PLANT CAPACITY
It connects with the following aspects :
• Level of Production Capacity
• Availability of Existing Standard of Production and production level
• Production Quality standards
• Production Target
• Current Plant Capacity
• Capacity to be increased for the future
• Production Cost
• Production Cost Control Techniques
• Preparation of Comparative Production cost statement
• Availability of Produced products
• Products to be Produced
• Analysis towards current market trend

14. V. FINANCIAL AND ECONOMIC ANALYSIS
 All measures of financial evaluation of
project’s feasibility are based on estimates of
costs and revenues.
 An inaccurate or wrong demand and sales
projection, being the result of careless and
carefree attitude towards demand and market
analysis, may lead to ultimate project failure.

15. OBJECTIVE OF FINANCIAL AND ECONOMIC ANALYSIS
• To reduce Expenditure
• To apply control over the outlay of the project
• To increase efficiency of the project finance
• To make valid investment
• To avoid unwanted expenditures
• To increase financial efficiency
• To control office and administrative cost , sales and
distribution cost
• To control operational cost
• To achieve the financial goals of the organization
• To have effective and efficient cost administration

16. NPV , PV, PBP, ARR
(A) NET PRESENT VALUE
NPV = TOTAL PRESENT VALUE – INITIAL INVESTMENT
PRESENT VALUE = CASH INFLOW X DISCOUNT FACTOR
(B) PAY BACK PERIOD
It is a process of recovery of invested amount in fixed asset in how many
years is called pay back period
(C) ACCOUNTING RATE OF RETURN
• ARR = Average Income / Average Investment x100
• Average Income = Total Income / Total No of Years
• Average Investment = (Original cost of the Machine – Scrap Value /2 )+
Additional working Capital – Scrap Value

17. Pay back period (PBP)
 Even Cash inflow
Cash inflow / Cash inlay (In Birr ) :
1st year – 20000 , 2nd year – 20000 , 3 year – 20000 , 4th year –
20000
Cash out lay = 100000 birr
Formula : PBP = Average Annual Cash inflow / Cash out flow
PBP = 20000 / 100000 = 5 years
 Un Even Cash inflow
Cash inflow / Cash inlay (In Birr ) :
1st year – 20000 , 2nd year – 35000 , 3 year – 20000 , 4th year – 45000
PBP = 3 years + to be received / Actually received
PBP = 3 Years + 25000/ 45000
PBP = 3 Years + 0.56 = 3.56 Years
IF PAY BACK PERIOD IS LESS ACCEPT OTHERWISE REJECT WHEN YOU
COMPARE TWO PROJECTS.

18. NET PRESENT VALUE ( NPV )
YEAR CASH INFLOW
(Uneven )
DISCOUNT FACTOR (10%) PRESENT VALUE
1 20000 0.909 18180
2 40000 0.827 33080
3 55000 0.751 41305
4 35000 0.683 23905
5 30000 0.621 18630
Total 180000 Total Present Value 135100
Less : Initial Investment 100000
NPV 35100
RULE FOR ACCEPTANCE OR REJCECTION OF PROJECT BASED ON NPV :
NPV is Positive then Accept
NPV is Negative then Reject
NPV is Neutral Reject

19. Average / Accounting Rate of Return (ARR)
Question :
A project Requires initial Cash outlay of 100000 birr.
Scrap Value is 40000 birr. Additional investment
required for the project is 20000 birr and the same
was invested at the end of first year . The annual
cash inflow for 4 years given as follows. From the
following details you are requested to find ARR.
Annual Cash inflow :
1 year – 50000 , 2nd year – 25000 , 3rd year – 45000
, 4th year – 30000.

20. Calculation of ARR
Formula : ARR = Average income / Average investment x100
Average Income = Total income / No of years
Average income = 50000+25000+45000+30000 = 150000 /4
Average income = 37500 birr
Average Investment = (original investment – Scrap Value /2 ) + Additional
Investment - Scrap Value
Average Investment = (100000 – 40000/2)+ 20000+ 40000
Average Investment = 30000+20000+40000 = 90000 birr
ARR = 37500/90000 x100 = 41.66 %
IF ARR SHOWS POSITIVE VALUE ACCEPT OTHERWISE REJECT
THE PROJECT

21. RULE FOR CALCULATION OF NPV, PBP, ARR AND IRR
NPV , PBP , IRR – PROFIT BEFORE DEPRECIATION AFTER TAX TO BE CALCULATED
ARR – PROFIT AFTER DEPRECIATION AND AFTER TAX TO BE CONSIDERED
INTIAL INVESTMENT : 100000 BIRR
DEPRECIATION TO BE CHARGED ON STRAIGHT LINE BASIS METHOD
YEAR PBDBT DEP
(10%)
PADBT TAX
(20%)
PADAT PBDAT
1 2 3 = 1+2 4 5 = 3-4 6 = 5+2
1 20000 10000 10000 4000 6000 16000
2 30000 10000 20000 6000 14000 24000
3 20000 10000 10000 4000 6000 16000
4 40000 10000 30000 8000 22000 32000

22. From the following information find PBP, ARR, NPV
and suggest which project is preferable
Year Project A Project B
1 20000 40000
2 25000 35000
3 20000 20000
4 45000 35000
5 55000 42000
Initial investment 100000 100000
Discount factor 10% 10%
Additional Capital 20000 20000
Scrap Value 5000 5000
Pay Back period ? ?
Average Rate of Return ? ?
Net Present Value ? ?

23. THANK YOU
END OF UNIT - IV