CHAPTER I

Introduction

The term “project” refers to a great variety of endeavors. These range from activities with
single purpose, well-defined structures such as small infrastructures projects to complex, multi-
component systems such as integrated rural and area development schemes (NEDA, n.d).

A project may be defined as “any activity that involves the use of one or more scarce
resources during a specific time period for the purpose of producing a socioeconomic return in
the form of goods and services” (NEDA, n.d.).

The Innovative Problem-Solving Model, (Prather and Gundry, 1995)

Prather and Gundry (1995) illustrates the project ideation process above which begins with
a problem, need, or opportunity, then proceeds through idea generation (the center of the
model) and implementation, and ultimately yields a result. Hovering over the model is a cloud
labeled “Work Environment”.

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 Most organization have an easier time being “creative”—that is, generating ideas—than
being “innovative”—that is, successfully implementing those ideas. Often the reason is that
people are paralyzed by the fear of failure, which makes trying something new exceedingly
difficult, if not impossible. In this way, a working environment that promotes employee
unwillingness to take the risk that can be a major barrier to innovation.

The following concepts are further mentioned by the said author to clarify the ideas
illustrated:

Divergent and Convergent Thinking

Divergent Thinking – seeks to build, amplify, to decorate, and to make something more
than it is.

Convergent Thinking – seeks to select and judge, to compare, and to make things happen
and deliver a bottom-line result.

Fundamentally different questions characterize each style of thinking: “What is good about
it” and “How can’t be used?” characterizes a divergent thinking while “What’s wrong with it”
and “Why won’t it work” characterizes a convergent thinking.

Five pitfalls that hinder innovation

1. Identifying the wrong problem

2. Judging ideas to quickly
3. Stopping with the first good idea
4. Falling to “Get the bandits on the Train”
5. Obeying rules that don’t exist

Project Categories

Projects may be categorized in various ways according to the following (NEDA

n.d):

 Objective – Social development or economic growth

 Sectors - Social, transport and agriculture.
 Number of Purpose – Single Vs. Multiple

Another major classification of projects describes the nature of its relationship

with other project.

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  Independent Project – those that can be implemented without the precluding
the implementation of other projects.
 Mutually-exclusive Project - those which when implemented preclude the
implementation of other projects.
 Complementary Project - those that requires implementation of other
projects to attain certain development objectives

Key Elements of a project

 Area of coverage of location

 Target beneficiaries/clientele
 Specific period of time for implementation
 Specified and quantified cost & benefits
 Methodology and Process
 Organization Management Structures

Development Planning Process

The purpose of planning is to determine the best possible way of achieving

specified development objectives within given time periods and the least possible cost.

Six components of planning process

1. Objectives for the planning period

2. Resources with which to achieve these objectives
3. Alternative way of achieving these objectives
4. Selection of the best alternatives
5. Implementation of the plan
6. Subsequent evaluation and modification

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 Advantages and Limitations of the project approach

Advantages Limitations
 Provides information on existing &  Being inherently a “partial
potential investment and their probable analysis”. It doesn’t take into
impact on national objectives consideration its own & related
 Provides more meaningful indicators projects impact on the economy
for reflecting true scarcity of resources
when markets forces don’t.  It cannot totally predict changing
technological trends, thereby
 Provides information in the impact of limiting capability for evaluation
proposed investment on different risk.
segments of the society
 Enables for better judgment of  It poses difficulties in evaluating
administrative & organization problems easily quantifiable project with
that may be encountered, making the those that are more subjective.
investment more manageable Evaluation must be more
qualitative and in line with overall
development
 Encourages conscious generation &  It is more applicable to investment
examination of alternatives where there is a clear cost-benefit
steam and well defined
beneficiaries & areas of coverage;
in which case, ongoing services
may probably be better analyzed as
program
 Reduces the data problem by focusing  It cannot adequately compare
on a smaller area of analysis objectives that are not subject to
valuing

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 Chapter II

PROJECT DEVELOPMENT CYCLE

Projects may be distinguished according to sector, purpose, relationship, objectives, scope,

target clientele, organizational structures and others such factors. All projects are subject to similar
process: all undergo a salient transition from inception to maturity that is referred as “project
development cycle” (NEDA, n.d).

Stages of Project Development

1. Pre-investment Phase – in this phase, alternatives are screened through service

evaluation. Some are eliminated at early stages and those that remains are further
scrutinized in succeeding stages, until finally, a definite project is single out for financing
and implementation
 Project identification – the process of searching for potentially rewarding
investment that will eventually be subjected to the test of a feasibility study.
 Project preparation – is the stage wherein overall feasibility of an identified project
is established basically, involves the investigation of the market, technical, financial,
economic, and operational viability of the project
 Project appraisals and financing- Details of the project are re-examined to ensure
that all elements influencing its feasibility are adequately covered.
2. Investment Phase - in this phase, the remaining detailed engineering design is carried out,
followed by the construction and installation of physical facilities and the provision of
development service as a part of project implementation.
 Detailed engineering design
 Project implementation
3. Post-investment Phase – in this phase, the project goes into full operation, which may
require the continuation of some development services initiated during the investment
phase. Upon the completion of the project, it is appraised in an ex-post sense and finding
are recorded and used for guidance in subsequent project planning activities. This activity
signifies the end of one cycle and feeds into pre-investment phase of the next cycle, forming
the identification of a follow-up project or of similar projects. In this way, the cycle repeats
and renews itself as a continuous process.
 Project operation – reaches the operation stage after investments have been made.
When expected project benefits start being generated
 Ex-post evaluation - to investigate the project performance and the impacts
whether direct or indirect
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 The process is a cycle because of each phase analysis develops from preceding ones which
in turns leads to subsequent phases of investigation. This reaches a final stage which signifies the
end of a cycle. This completion of one cycle signals the beginning of another one.

PROJECT IDENTIFICATION

Project identification is the process of searching for promising investment opportunities

that re directed towards over-coming problems constraining the achievement of desired
development objectives, or towards exploiting and existing development potential.

Process of project identification

1. Identification of development problem.

2. Identification of development potentials
3. Identification of projects
 Sectoral Studies – are valuable aids in identifying projects since allocation of
investible resources could then be made on projects that are likely to minimize
backward or forward linkages.
 Existing programs – many project proposals are likewise the result of request to
extend existing programs either, similar projects or in relation to other existing or
proposed projects
 Regional Development Investment Programs (RDIP) – major source of project
ideas at the subnational level. This is now regularly prepared and updated for each
of the 12 regions.
 Special regional / Subnational Studies- the set of specific objectives for different
sectors within a region and the types and locations of the facilities and resources
needed to achieve these objectives are ascertained through this.
 Technical Linkages- projects are sometimes identified on the basis of their technical
characteristics such that together with existing and or proposed investment, they
form technically integrated programs.
 Market Studies – potential investment can be identified from the analysis of
external and internal markets including the market for public goods and services
 External market – may cover (1) Production of commodities in
which the country has a comparative advantage (2) production of
commodities requiring a minimum size plant, capacity of which
exceeds the volume of domestic demands.
 Internal markets - related to (1) Import substitution (2) Domestic
demands possibilities (3) Market for Public Goods and Services.
4. Preliminary Selection – once a series of promising ideas have been generated they need to
be screened systematically until most suitable projects ideas are retained.
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 Chapter III

PROJECT FEASIBILITY PREPARATION

It is a stage wherein the project is design to achieve maximum benefits at the lowest
possible cost. A well balanced and well prepared feasibility study forms the basis for sound project
design and increases the probability of success of a project.

There are two general steps in project preparation

1. Preparation of feasibility study that will provide information to determine whether or

not to proceed more detailed planning,
2. Detailed planning and analysis once the feasibility studies have indicated which
projects would be worthwhile pursuing.

A Feasibility study involves five functional areas of analysis namely market, technical,
financial, economic and operational.

A. Market Aspect - Is to determine the extent to which the product/services to be

generated is needed or demanded and to design appropriate marketing plans and
strategies for the project outputs.
B. Technical Aspect - Is to identify and analyze alternative ways of carrying out the
project in terms of its size, location, basic technical features, resource requirements,
phasing of implementation and social acceptability.
C. Financial Aspect - to determine the financial feasibility and where relevant, the
debt-service capacity of the project. Areas of investigation include a comparison of
the financial cost of projects implementation and operation with the expected
incomes over the project lifetime.
D. Economic Aspect – is to determine the project’s contribution to the national
economic and social welfare.
E. Operational Aspect – is to determine whether the project can in fact be
implemented and put into operation considering the political, legal, organizational,
managerial, institutional and other administrative constraints which may impinge
upon the process of project implementation/operation.

Levels of Feasibility Analysis

There are 2 stages in assessing project viability: (1) Prefeasibility and (2) Feasibility
studies. In substance there are similar differing mainly in the degree and accuracy involved

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Prefeasibility Study

To conduct this study of the project primarily to:

a) Narrow down the range of possible alternative solutions

b) Ascertain whether on the basis of the result obtained, the allocation of scare
resources for the preparation of more detailed feasibility study is warranted.
c) Established the work program for further development of the project.

Plan for further Project Development

Depending on the result of the Prefeasibility Study, any of the following decisions may be
taken:

a) Reject the Project – should the analysis conclusively reveal that none of the
possible project alternatives is feasible from the technical and or
economic/financial viewpoints even in the future, and then the project should be
discarded outright.
b) Defer conduct of detailed feasibility study – should the analysis reveal that the
project can be feasible only if the implemented in a relatively distant future, then
the detailed feasibility study of the project should be postponed. Deferring the
execution of the study is advantageous since the demand and supply characteristic
may drastically change during the intern period.
c) Proceed directly to detailed design & implementation – the economic and
technical soundness of the project may turn out to be highly evident during
prefeasibility study. Thus, there is no point in spending additional resources for a
detailed study. In such cases, it is only logical to immediately proceed from the
prefeasibility study phase directly to detailed design and project implementation.
d) Conduct a detailed feasibility study – it is only necessary if the study indicates
the following: (1) More detailed information is required to produce more
conclusive result (2) Alternatives schemes of the project are nearly of the same
degree of feasibility and or show marginal feasibility and (3) New alternative
solutions have emerged whose feasibilities need to be ascertained through more
detailed analysis.

Feasibility Study

a) Objective of the study – the purpose of the study should be set out in clear and
comprehensive terms.
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 b) Scope of the Study – the geographic area and or category of project beneficiaries
of study must be defined.
c) Methodology - vital component of the study. It is defining as the analytical
procedure to be followed in order to facilitate the orderly development of the
project. It should be conforming to universally accepted practices of the project
analysis. It should be specifying in the following: (1) Methods for data collection
and organization (2) Feasibility evaluation techniques including the factors and
parameters to be considered and (3) Degree of detailed desired.
d) Program of work - a general time-based program of work indicating the sequence
of various analytical operations together with their functional inter-linkages.
e) Resource Requirement - it is the needed resources to implement the study.
f) Participating entities - the project proponent either government or private entities.

Practical Consideration in Project Preparation

1. Need to Organize and Plan

2. Need to Gather Firsthand Information
3. Need to Develop Confidence and Exercise Judgment
4. Need to Keep a Critical and Open Mind
5. Need to Develop a Supportive Environment
6. Need to Focus on More Critical Aspect of the Project
7. Need to Balance Technically Skills with Behavioral Skills

MARKETING FEASIBILITY

The objective of the marketing study (1) to determine the extent to which the goods/service
to be generated by the project are needed or demanded and to design the appropriate marketing
strategies (2) Plans will help ensure that the projects outputs will reach and be accepted by the
target users.

Market - Refers to an arena for potential exchanges that may be involving money.

Demand Analysis – Involves the estimations of market demand for the output/s of the proposed
project. It involves (1) Identification and analysis of demand determinants (2) Estimation of past
& present demand and (3) Projection of future demand

Identifying Demand Determinants – determinants are used to determine the level of demand for
particular good or services.

Important Demand determinants need to be considered

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 1. Population
2. Income
3. Prices
4. Substitution Possibilities
5. Exchange in Users Taste
6. Rate of Investment
7. Government Policies and Budget
Relative importance of the above factors as demanded determinants depends on whether
one is analyzing consumer or producer demand or the demand for non-marketed goods such
as social services.
Consumer Demands – Consumer or final demand reflects the demand for a product
for final consumption purposes.
Producer Demands – Producers or intermediate demand is the demand for a product
which is used as an input to the production of other goods and services.
Demand for social services – the demand for social services is a special case of
consumer demand where services have no market price, where needs are virtually
unlimited and where the limiting factor is government ability to pay rather than consumers
income.

Estimating Past and Present Demand

In the following sections the sources of data, considerations on historical data to be covered
and technique for demand estimation.
a. Source of Data – data on demand can be obtained either first hand on from existing
documentation or both.
b. Historical Data Coverage – the period for which data on the qualitative and
quantitative aspects of demands are collected and synthesized depends on the
following: (1) Homogeneity of statistics – statistic availed of should be comparable
over the period. (2) Factors which may have significantly changed the trend of
demand for the project output.

c. Techniques for Demand Estimation

 Standards or Coefficients
 Chain ratio Method
 Market Buildup Method
 Time series models

Projecting Demand
a) Survey of people intentions and needs assessment – adoption of the demand
characteristic of population in comparable areas where experiences has been
documented as a result of the implementation of similar projects may not be
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 appropriate. Needs assessment entails the collection of information through fields
of investigation where specific questions relating the outputs of the project under
consideration to the actual and perceived needs of the target population are asked
through direct contact with a sample of population.
 Common obstacles include: (1) Alternatives that the project population
presently dealing with problems is addressing (2) Opportunity cost of
accepting the goods or services provided under the project (3) Cultural
benefits or social norms that deter the intended beneficiaries’ from wanting
what will be provided by the project.
 Common Tool – Sample Question

b) Expert Opinion - Includes those who are potential clients and who can speak for
the rest of the beneficiaries.
Expert Groups are categorized in to 3 namely Group Discussion Method, Pooled
Individual Estimates Method, and Delphi Approach
Group Discussion Method - Expert brainstorm as a group and come up with a
consensus estimates
Pooled Individual Estimates Method - Expert come up with individual estimates
and the group leader consolidates them into a single estimate.
Delphi Approach - Expert provide Individual estimates and assumptions which
are reviewed by the group leader revised and followed by second, third, or more
rounds separate estimations.

c) Use of Planning Standards

d) Market Testing - where the potential beneficiaries are not clear about their
preferences or are not quite consistent in what they say and what they do or where
expert cannot make good guesses a more direct approach.
e) Time Series Analysis - Method of projection, historical demand data is collected
for a number of years.
f) Other Demand Consideration – in order to arrive at meaningful projections of
future demands, forecasts made using the aforementioned techniques should be
modified to reflect other consideration.

Supply Analysis

Estimates of past and present levels of supply are necessary to arrive at an initial forecast
of supply conditions during the project lifetime.

Steps in the Supply Analysis

a) Identifying Supply Process

b) Estimating Past and Present Supply

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 c) Projecting Supply

Demand-Supply Consolidation

a) Past and Present Supply-Demand Gap

b) Future Supply-Demand Gap without the Project
c) Future Supply-Demand gap with the Project

Other Major Market Consideration

a) Competitiveness of the product

b) Government Policies
c) Marketing Programs
d) Marketing Planning
 Market Segmentation – an effective marketing plan typically starts with
market segmentation. The reason for this is that the market for the project
outputs are often made up of individuals who do not share the same
preferences and capabilities and do not respond similarly to market
influence.

Segmentation Variables
1. Geography – markets may be divided into geographical
areas
2. Demographic – Classified by sex, age, income etc.
3. Psychographic – in terms of individual traits
 Market Targeting
1. Undifferentiated Marketing – design one set of marketing
program that will appeal to the broad.
2. Differentiated Marketing – design separated product for
each marketing segment.
3. Concentrated Marketing – select one or few and design an
appropriate marketing plan.

 Product Mix Strategy

1. Marketing Mix - refers to controllable variables that can be
used in the project to influence the behavior of the intended
beneficiaries. Table 1 presents a manner of how we go
through this part.

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 Table 1
Marketing Mix
Product Place Promotion Price
Quality Distribution Publicity Level
Channels
Features Distribution Advertising Discounts
Coverage
Options Outlets Personal Allowances
Promotion
Style Inventory Payment
Level and terms
Locations
Packaging Transportation
System
Service Level
Other Services

a) Pricing – important element that may determine whether or not the

output will be accepted by the market and to what extent the project
will be self-sufficient.

Price may be based on:

1. Cost Based Pricing

 Markup Pricing
 Target Pricing
2. Demand Based Pricing
3. Competition-oriented Pricing
b) Marketing Channels
Factors in determining Marketing Channels
1. Characteristic of beneficiaries
2. Characteristic of products
3. Characteristic of the intermediaries’
4. Characteristic of project management/proponent
5. Characteristic of competitors
6. Environment Factors

c) Distribution Decision – getting the right product to the right location at

the right time at the least possible cost.

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 Physical Distribution Systems
1. Single Output, Single Market
2. Single Output, Multiple Market
3. Multiple Output, Multiple Market

d) Promotion and Communication

Types of Promotion to persuade its beneficiaries:

1. Rhetoric
2. Propaganda
3. Negotiation

Effective promotion and communication network take into

account following roles and characteristics of the players

1. Audience
2. Channels
3. Message
4. Communicators

Promotion Instruments

1. Advertising
2. Personal selling
3. Publicity
4. Other Promotions
 Marketing Organization – depending on the complexity of marketing
mix of a project, the organization needs of the of the project may range
from one person to a whole division of the project staff, and even to
several locational dispersed offices
 The Sales and marketing Budget.

This part summarizes the level of sales related to capacity of production

including selling and promotional expenses.

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 TECHNICAL FEASIBILITY

Evaluating the technical feasibility of the project can be based on the following
components:

A project is considered technically feasible if:

a) Its size and capacity, location, layout, technology, and timing are commensurate and
appropriate to the demand.
b) All of its technical features are reasonable defined and found to be workable, adequate
and acceptable or social feasible
c) Input resources are available in the requirement quantities
d) There is assurance that the facilities will produce the qualities and quantities of the good
and services required on a continuing and dependable basis.

Technical study involves consideration of the following:

a) Alternative ways of carrying out the project in terms of the technology or production
process to be used, size or scale, location and timing of implementation.
b) Social Feasibility aspect of each alternatives
c) Corresponding physical resources requirement
d) Plan for implementation and operation

Concept of Technical Alternatives

a) Reforms in the existing administration and or existing regulation by improving the

operation efficiency of existing facilities, thereby increasing the capacity of the present
supply system.
b) Rationalization of the existing price system for more efficient utilization of facilities and
services.

Modification in the physical plans

c) Capital Investment to increase the capacity of the supply system to provide the desired
goods and services.

Alternative Technology or Production Process

1. Variation in Product type - The Nature of product or service may differ in terms of:
o Quality
o Product Range
o Stages of processing
2. Variation of Techniques – Differences in production technique may involve one or more
of the following:

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 o Technical Process or Method
o Equipment
o Raw Material and Supplies
o Level of Technology

Alternative Production Techniques may be considering the following:

1. Availability of Raw Materials, Technology and Equipment

2. Cost of production and marketing
3. Size of the market and profit margin of then product
4. Other social and economic consideration

Alternative Sizes (Scale) - Refers to the project capacity to supply the goods/services demanded
over a period of time.

Factors in the determination of suitable project size incudes:

1. Volume and Nature of demand

2. Production Process
3. Physical Resource bases
4. Location and transport cost

Alternative Location – Refers to the site where the project is to be situated

Major consideration in the selection of site

1. Geographical distribution of demand

2. Transport
3. Production Process and resources
4. Other Factors

Alternative Timing – refers to the schedule of various activities involved in the implementation
and operation of a project

Major consideration in the determination of the most appropriate schedule of implementation

includes the following:

1. Level of Output
2. Funding Constraints
3. Technical Factors
4. Natural Factors
5. Social Factors

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 FINANCIAL FEASIBILITY AND ECONOMICS ANALYSIS

Other than the organization, marketing and technical studies, the acceptability of a project
is strengthened by the following financial tools described as:

Profitability – refers to the comparison of either financial or economic cost with benefits

Financial Profitability Analysis – is concerned with determining the income that the project
would generate for the project-operating entity.

Economic Profitability – is directed toward the establishing the net return that the project would
generate for the economy/society as a whole.

Time Value of Money - the essence of this concept is that money received or consumed at a
particular time has greater value than the same money received or consumed at some future time.

There are several interrelated explanations and these are the following:

1. There is a normal preference for present vs. future consumption.

2. Resources on the hand may be invested during the intervening period to generate
income or earn interest.
3. There is a risk of uncertainty factors.

a) Discounting – is a process of translating future values into to their present worth

Formula:
Ao = An (1/(1+r) n)
Where: A0 = Present Value
An =Expected value at year N
r = Discount Rate
n = number of years
(1/(1+r) n) = is referred to as discount factor
b) Cash and Resources Flow – refer to the movement of cash resources and are more
relevant to financial analysis and financing activities.
c) Discount Rate – depends on the purpose for which the discounted cash flow is to be
used. The relevant discount rate would be: The cost of borrowing and the yield of
alternatives opportunities.
d) Discounting period – refers to the number of years over which benefit and cost are
measured and discounted.
e) Table of Discount Factors - the process can be simplified using the discount tables.

Tool of Profitability Analysis

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 A. Net Present Value (NPV) – defined as the difference between the present value of project
benefits and project costs
Formula:
NPV = ∑ bi - c i
(1+r)i
Where : bi = benefit in period i
r = discount rate
ci= Cost in period i
B. Benefit Cost Ratio – ratio of the PV of the gross benefit to the PV of the gross cost.
B/C = ∑ bi / ∑ ci
(1+r) I (1+r)i

C. Internal Rate of Return (IRR) – refers as the discount rate which equates the PV of the
projects benefit cost so that the NPV is Zero and the BC ratio is one
NPV = ∑ bi -- ∑ ci =0
(1+r) I (1+r) i

And
B/C = ∑ bi -- ∑ ci =0
(1+r) I (1+r) i

Procedures for Estimating the IRR

1. Choose a discount rate at which NPV is expected to positive and compute
for the NPV. If the NPV is Positive proceed to next step. If NPV is negative
choose one or more lower discount rates till a positive NPV is obtained the
proceed to step 2.
2. Choose another higher discount rate at which the NPV is expected to be
negative. If the NPV turns out to be negative proceed to the next step.
Otherwise choose an even higher discount rate until a negative NPV is
obtained. Then precede to the last step.
3. Once two discount rates, one yielding a positive NPV and another yielding
a negative NPV have been obtained, interpolate for the discount rate at
which NPV equal zero. This is the internal rate of return.

D. Recoupment (Payback) Period – is used to determine the number of years it takes to recover
all the capital invested.
Formula: Original Investment / Gross Annual Profit

E. Accounting Rates of Return – using the financial ratios such as ROE, ROI, ROA, EPS and
Dividend Yield of Stocks

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 FINANCIAL ANALYSIS

Financial Analysis refers to the assessment of the project commercial profitability and
capability to service its obligations

Statements that are assessed here are the following:

1. Income Statement - is defined as the excess of revenues over expenses; loss is the excess
of expenses over revenue.
2. Balance Sheet – indicates the expected financial position of the project at specified future
dates. It shows the assets that are expected to be available for use of the project and how
they are expected to be financed
3. Cash Flow Statement - shows the expected annual movement of cash into (receipts) or out
(expenses) of the project account

How receipts are generated?

1. Decreases in non-current assets
2. Increases in the Long Term Liability
3. Increase in equity
4. Noncash expenses which have been deducted from the gross income for the period
and should be added back as sources of cash

How expenditures are incurred?

1. Increase in the fixed assets
2. Pre-operating expenses
3. Increases in the inventory
4. Loan amortization

Analysis of Financial Profitability

• Liquidity Ratios -used to assess the ability of a company to meet its current obligations.
Important indicators of liquidity are:
CURRENT RATIO:
CURRENT ASSETS/CURRENT LIABILITIES
QUICK RATIO:
(CURRENT ASSETS-INVENTORIES)/CURRENT LIABILITIES

• Profitability Ratios -measures how much operating income or net income a company is
able to generate in relation to its assets, owner's equity and sales.

Among the more notable profitability ratios are the following:

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 PROFIT MARGIN RATIO:
= NET PROFIT/NET SALES
RETURN ON ASSETS RATIO:
= NET INCOME/ASSETS
RETURN ON EQUITY RATIO:
= NET INCOME/EQUITY

• Leverage Ratios -this is the grouping of ratios designed to assess the balance of financing
obtained through debt and equity resources.
Some of the important leverage ratios are the following:
DEBT TO TOTAL ASSETS RATIO:
TOTAL DEBT/TOTAL ASSETS
TIMES INTEREST EARNED RATIO:
(PROFIT BEFORE TAX + INTEREST EXPENSE)/INTEREST EXPENSE

• Activity Ratios- shows how certain assets or liabilities are used efficiently in the production
of goods and services.
Among the more common efficiency ratios are:
INVENTORY TURNOVER RATIO:
COST OF GOODS SOLD/INVENTORY
FIXED ASSETS TURNOVER:
NET SALES/NET FIXED ASSETS

ECONOMIC ANALYSIS

The objective of this analysis of project preparation is to ascertain the projects desirability
in terms of its net contribution to the economic and social welfare of the country as a whole
Economic Analysis – is a method by which the net effect of a proposed project may be
determined. It can also be undertaken to rank projects in order of importance with respect to the
development goals, although not all techniques are suitable for this purpose.
Application of Economic Analysis of a project:
a) Definition of the set of development objectives against which a project feasibility
is to be assessed
b) Translation of development variables into common denominator by which project
benefits are measured.
c) Identification and valuation of project cost and benefits.
d) Comparisons of cost and benefits
e) Recommendation on the selection of project accepted, rejected, deferred or
modified.

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Methods of Economic Analysis
1. Cost benefit analysis – the maximization of individual welfare leads to the optimum
allocation of resources.
a) Identification of project cost and benefits
1. Identification of direct cost
 Capital Cost
 Operating and maintenance Cost
2. Identification of direct benefits
3. Identification of externalities, secondary benefits and intangibles
4. Adjustment to inputs from the financial statements
 Taxes and Subsidies
 Financial Charges, interest and Amortization
 Depreciation
5. Two grounds rules: comparing the “with” from the “without the project”
conditions and avoiding double counting.

b) Valuation of cost and benefits in terms of economic prices

1. Choice of Numeracies – the unit account used in measuring cost and
benefits is a function of the goal being assessed.
2. Shadow Prices - are the values of the values of project inputs and outputs
reflecting their relatives scarcity or availability as well as their relative
importance in achieving the various socio-economic objectives
 Market prices may not represent the real security value of production
factors of the economy
 Market prices may not reflect the socio-economic policies and
objectives of the government
Four types of Shadow Pricing
 Shadow price of Foreign Exchange – it is equal to the official
exchange rate if all trade distortion as well as domestic price
distortion were totally eliminated.
 Shadow Price of Labor – the value of output foregone as a result as
a result of its employment in the project.
 Shadow Price of Land – land used in a specific project is the value
of output foregone that the land could have produced if utilized in
its best alternative use.
 Opportunity Cost and Capital – as the rate of return which the fund
would have earned in its best available alternative uses.
3. Valuation of Direct Cost – estimation of direct project cost.
General procedures for estimation are the following:
a) The entire set of project inputs must be differentiated between those
inputs that reduce the supply to other users, and those inputs that
would be supplied from increased production

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 b) For inputs resulting in reduced supply to other users, the shadow
prices are the market selling prices appropriately adjusted for a.) the
value of rationed components b.) the effect of monopoly power in
buying or selling c.) the actual price impact of the supply reduction.
c) If the supply of inputs is obtained from the expanded production, the
relevant cost estimate is actual cost of production.
d) If some inputs are imported or are substitutes for exports the foreign
exchange cost involved corrected by the shadow price of foreign
exchange should be estimated and any transport cost and trade
service margin should be added.
4. Valuation of Direct Benefits
a) For outputs to additional supply/ reducing the output of other local
producers, the shadow prices are the market price, corrected for the
following: effects of any rationing and monopoly power of some
buyer and actual price impact based on the size of the additional
supply
b) For goods that are substitute for import or add to exports, Forex
earnings or savings involved are estimated and corrected by the
shadow price of the Forex.
c) For goods/services that are supplied freely, the value placed by users
on the facilities should be estimated.
5. Inflation and relative price changes

c) Present value comparison of cost and benefits, sensitivity analysis and selection of
project based on derived economic feasibility indicators.
1. Social Discount Rate – the rate used to discount the future discount the
future streams of estimated cost and benefit
 Opportunity Cost of Capital (OCC) – represents the marginal return
on invested capital.
 Social Time Preference (STP) – reflects the diminishing value of
consumption overtime. It is also referred as Consumption Rate of
Interest (CRI)
 if the valuation were in terms of aggregate consumption then use
STP or CRI
 if the valuation were in terms of aggregate saving then use OCC.
2. Economic Feasibility Criteria – the NPV is deemed the best measure of a
project economic worthiness and its adoption as basis for accepting projects
is recommended.
3. Sensitivity Analysis
Critical items need to be tested:
 Wage rate of certain classes of labor
 Discount rate
 Timing of implementation
 Relative weights given to the various goals being assessed.
4. Project Ranking for Investment Programming

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Limitation in the use of Economic Analysis
a) Social Sector Project
b) Integrated Area Development (IAD)
c) Project Supportive of Multiple Development Objectives
Cost-Effective Analysis (CEA) – helps determine the best way of achieving the target outputs or
objectives of a project under study.
Some Consideration in Using CEA
a) Measures of effectiveness
 Timing of benefits
 Multiple Benefits
b) Cost
c) Cost effectiveness criteria
 Least total cost
 Least average cost per unit of effectiveness
 Least marginal cost per unit of effectiveness
Cost-Effectiveness Analysis for Assessing Project Worth
a) Analyzing worth of project with single effects
Formula: C/E = Net Monetary Effects/Net Health Effects
b) Analyzing worth of project worth with multiple effects
 Analyzing projects with monetary and non-monetary
Formula: C/E = Cost of inoculation/ Death Averted – Death Caused

Cost-Effectiveness Analysis for Determining Project Design

a) Determining optimal intensiveness
b) Optimal project design
c) Optimal program design
d) Considering timing of project effects

Inclusion of other Socio Economic Objectives

The objectives that have been directly or indirectly are the following:

 Increase national income

 Employment creation
 Capital formulation
 Increase in foreign exchange reserve

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 Other goal may include the following:

 Total human development

 Equitable distribution of income and wealth
 Regional development and industrialization
 Self-reliance in energy sources

ORGANIZATION AND OPERATION FEASIBILITY

1. Operational Feasibility
a) Political Acceptability and Legality of a project – a major consideration in judging
the operational feasibility of a project.
b) Social Soundness of the project - assessing the compatibility of the project with the
socio-cultural environment in which it is to be introduced, the like hood that new
practices or institution introduced among the initial project target population and the
social impacts or distribution of benefits of a burden among different groups.
c) Local participation-
 Properly defining the geographical boundaries
 Holding series of meeting
 Involving prospective beneficiaries in testing a new technology
 Developing an effective communication process
 Establishing organizational arrangement
 Technical training
 Offering opportunities

2. Organization and Management of a Project

a) Project Organization – a project may be implemented and put into operation by an
existing organization, matrix organization and new organization
 Management Capability
 Staff Capability
 Institutional Capability
 Efficiency of System and Procedures
b) Setting Up a Matrix Organization – selected personnel of exiting government
agencies are organized to form a project management team.
c) Setting up a New Organization - creating new organization for the project

3. Resources Availability and Cost – implies the possibility of obtaining them within the
allowable cost limits set in the financial and economic studies of the project.

4. Adjustment in Project Design – adjustment in the technical design can be made without
rendering the project technically or economically unfeasible, and then such adjustment
should be made to make the project operationally feasible.

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 CHAPTER V
PROJECT DEVELOPMENT

PROJECT APPRAISAL AND FINANCING

It deals with: project appraisal, financial needs and sources, financing from the national
and local budget and other sources of financing
Project Appraisal – covers the basic study areas and applies the same general analytical
techniques as those required for project preparation
a) Marketing Aspect – appraisal should be made on the nature of the product and its
market in terms of geographic coverage and target groups.
b) Technical Aspect – appraisal should determine whether the design is suitable in
terms of capital expenditures per head, scale in relation to market, skill
requirements, inputs requirement and product in relation to target markets.
c) Financial Aspects - should quantify the amount of subsidy required by the project
continuous operation.
d) Economic Aspect – verifies whether then cost and benefits or effectiveness
indicators have been fully identified and appropriately measured.
e) Management and Organizational Aspect - verifies if organization is equipped with
necessary manpower.
f) Political and Legal Aspect – the project should be acceptable not only national or
local but also to the people affected by the project.
g) Sociocultural Aspect – confirms the jurisdiction of the project as proposed,
deliberations proceed to financing arrangement, terms and conditions.
Financial Plan – a plan that tells the source of funds and activities together with its amount needed.
Preparation of financial scheme for either public or private sector projects generally involves
the following steps:
1. Determination of the specific requirement of the project
2. Selection of the appropriate type of financing
3. Identification of alternative sources of funds
4. Establishment of acceptable capital structure
5. Determination of the effective cost of financing from each sources
6. Comparison of effective cost financing with the rate of return on project investment
7. Determination of maximum amount obtainable from each alternative sources
8. On the basis of foregoing and considering the projects objectives, formulation, and
appropriate financing scheme.

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Financing requirement and Loan Proposal
a) Project cost – total investment needed for the project. It may vary depending on the
investment required
b) Loan Proposal – a proposal where it is states any sufficient or total amount of investment
where funds source are banks usually back up by collateral.

Sources of Financing
a) General Revenues
 Continuing Appropriations
 Annual Appropriations
b) Borrowing
 Bond Issues
 Borrowing from financial institution
c) Earnings
 Local Governments
 Corporations
d) Loans
 Direct National Government Obligations
 Corporate Obligations
 Local Government Obligations
e) Grants
f) Government own banks
g) Private institution

Student Activities
1. Reaction Paper on film viewing: Steve Jobs, the Movie
2. Assignment on Project Life Cycles
3. Conduct of Research to complete each part of the FS
The final component of this material is the format prepared for students to guide them complete
each aspect of the project study chosen. Students are required to finish and submit each required
part weighing 25 points each, in accordance with the allocated time to include lectures and
discussions stated in the syllabus. A final complete paper shall be submitted that will accrue a
total 100 points.

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The Feasibility (FS) Study Outline
The Market Feasibility
 Product Description
 Supply Projection
 Demand Projection
 Supply and Demand Analysis
 Market Channel
 Price and Price Trend
 Packaging, Branding and Promotion
 Sales and Expenses projection
 Marketing Budget
The Technical Feasibility
 The Product
 Capacity of Production
 The Production Process and production Schedules, Calendar of Activities with Budgetary Estimates
 Gantt Chart
 Facilities Tools and Equipment Requirement
 Depreciation Schedule
 Schedule of Replacement and procurement of equipment
 Labor Requirement
 The Production Cost Schedule
The Organization and Management (O/M) FS
 The Name of the Organization
 Form of Organization
 The Organization Vision mission and Goals
 Organization Structure
 Human Resource Program and Budget
 Organization Cost
 Taxes and Licenses Schedule
 Organization Policies
The Financial FS and Economic Analysis
 Sources and Uses of Fund
 Loan Amortization Schedule
 Cash Flow Projection
 Income Statement Projection
 The Balance Sheet Projection
 Profitability Analysis
 Economic Analysis

References

National Economic and Development Authority ([NEDA], no date). Project development

manual. Philippines

Prather and Gundry (1995). Blueprints for innovation. American Management Association
[AMA]New York

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Chery C. Lacaden, College of Business and Economics NVSU Bayombong Nueva Vizcaya Page 27
Salvosa Cristina, Espiritu Orland, Sta. Maria, Cielo, Lacaden Chery (2002). Feasibility Study on
Native Chicken. Submitted to NEDA

Siddiqui Moid (2009). A managers’ toolkit for creativity and innovation. Wisdom tree: New
Delhi.
www.managementstudy12.com

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