LECTURE HANDOUT 3

CHAPTER –PREPARATION OF PROJECT PROPOSAL

COURSE- PROJECT MANAGEMENT
MBM PROGRAM, IIUC
Manjurul Alam Mazumder*
LEARNING OBJECTIVES:
 Feasibility Study
 Project Proposal

DISCUSSIONS ON THE LEARNING OBJECTIVES:

3.1 Concept of Feasibility Study
Feasibility study is a pre-investment evaluation or ex-ante appraisal to determine the viability of
the project to succeed. It is a pre-requisite for preparation of a project proposal. A feasibility
report is usually prepared by the professional firms, project consultants, and academicians for
their clients, promoters, and entrepreneurs. During early stage a feasibility study was referred to
the examination of financial profitability of a project. But at present a feasibility study must
cover the following analysis as shown in the diagram.
Schematic diagram of Feasibility study:

Generation of ideas

Initial screening

Is idea prima facie promising? No

Yes
Termination
Plan for feasibility analysis

Conduct economic /
Conduct technical analysis
market analysis

Conduct financial Conduct managerial

analysis analysis

Conduct social cost

benefit analysis

Conduct ecological and

environmental analysis

Is the project worthy? No

Yes Termination

Prepare funding
proposal
3.2 Areas of Feasibility Study:
A comprehensive feasibility covers the following six study areas:

i. Technical, includes manpower and technological requirements

ii. Financial, includes profitability analysis, funding sources of the project
iii. Economic justification, such as demand – supply gap, costs and benefits;
iv. Administrative or managerial, includes external linkage and internal organization;
v. Social / political, includes demographic data and social needs;
vi. Environmental, includes impact of project to the environment;

The following five interrelated questions are to be addressed in feasibility report:

i. Is the proposed project responsive to urgent present or anticipated social or economic
needs?
ii. Will the project as planned adequately serve or fulfill the intended purpose without
harming the environment?
iii. Will the benefits of the projects to both society and the economy be justified by the
costs?
iv. Should various technical alternatives be studied to optimize or maximize the cost
effectiveness of the project without sacrificing its quality or function?
v. Does the feasibility report provide sufficient baseline criteria and measures to
establish a checklist for subsequent project implementation and evaluation?
The following data and information1 are required in a complete Feasibility Study:

A. Technical Analysis:
Need to concentrate on the followings-
1. Availability of raw materials and possible changes in future in its uses
2. Availability of power and other inputs (water, Gas, coal, spare parts etc.)
3. Selection of scale of operation or plant size
a. Technology required
b. Inputs constraints
c. Investment cost
d. Market condition
e. Resource of the firm
f. Government policy
g. Optimal size (best size)
4. Selection of production process and its technology
5. Choice of machinery, equipment and auxiliary of equipment
6. Choice of appropriate technology
7. Safety measures
8. Disposal of industrial waste and effluents.
9. Ecological and environmental pollution through the technology adopted
11. Projecting project time and cost
12. Time until ready to install and length of disruption of production during installation
13. Length of trial production and learning curve
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Adapted the Check List of Louis J. Goodman

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 14. Proposed layout of the factory and process
15. Justification of locating site
16. Availability of infrastructural facilities
17. Quality control and its cost
18. Cost management
19. Use of network analysis for implementation of the project
20. Avoidance of time and cost overruns
21. Manpower required and its combination among unskilled, skilled and high skilled
22. Availability of spare parts and transfer and technical know-how
23. Need for foreign technicians; their cost, and availability
24. Technical licensing, franchising, joint-venture etc.
25. Project designs, charts for structures and civil works

In sum, the following issues should be considered in technical analysis:

a. Site data
- Geology
- Soil condition
- Drainage characteristics
- Climatic conditions
- Water supply
- Waste disposal
- Power
- Transportation

b. Choice of available technologies

- Equipment & machinery
- Manufacturing process
- Spare parts

c. Design
- Layout
- Engineering requirements
- Construction materials (local verses imported)

d. Manpower
- Professional
- Technical
- Labor

B. Financial Analysis:
Many issues required to examine the financial viability of a project, which are as follows:
1. Profitability measurement
- ARR, NPV, IRR, PI, PBP
2. Cost of the project-Fixed assets and working capital
3. Cost of technology
4. Need of foreign exchange and its availability

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5. Cost escalation
6. Means or source of financing
a. Equity participation
b. Debt or bonded capital
c. Terms loan from Financial Institutions
d. Leasing or buying
e. Suppliers’ credit
f. Loan or grants
g. Capital subsidies
h. Unsecured loans
i. Working capital financing
7. Estimation of production scales
8. Cost of production at various level of output
9. Breakeven production and sales point, that is operating and financial breakeven points.
10. Cost of capital – WACC and investment schedule (IOS)
11. Debt servicing
12. Tax structure and burden regarding IT and VAT
13. Provision for tax holiday
14. Pay back period
15. Impact on cash flows
16. Cash requirements with time frame
17. Impact of seasonal and cyclical fluctuations
18. Pre-operating expenses
19. Profitability projection over the life of the project
20. Financial projections:
a. Projected income statement
b. Projected balance sheet
c. Projected cash flow statement

In sum, the following issues should be highlighted in financial analysis:

a. Profitability Analysis
- Net Present Value (NPV)
- Internal rate of return (IRR)

b. Source of funding
- Internal
- External

c. Adequacy of fund
- Dependency index
- Suitability index

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C. Market Analysis:
It indicates evaluation of a project’s feasibility in terms of market. The market analysis involves
the search for and analysis of data that can be used to identify, describe and quantify the market.
A market analysis should contain the following issues: (i) Analysis of Past and Present demand;
(ii) Analysis of Past and Present supply; (iii) Estimation of future demand of the project; and (iv)
Estimation of projects’ share in the market.

A detailed market analysis should address a number of issues, such as:

1. Aggregate demand of the product/ Service produced/ rendered by the project

2. Growth rate of demand (some methods of demand forecasting are Trend projection,
Consumption level, Leading indication method, and Economic method)
3. Demand in different segments of market
4. Expected share of market
5. Consumption trends in the past, present and future (Projection)
5. Past and present supply position
6. Smuggling or illegal entry of goods or free movement of goods as conceived of in open
market economy operation by WTO
8. Production potentialities and constraints.
9. Import and export of the product
10. Nature of competition
11 Cost structure
12. Satisfaction with existing product
13. Unsatisfied need
14. Consumers attitude toward various products
15. Consumers motives for buying
16. Elasticity of demand, income and supply
17. Consumer behavior, intentions, test and fashion, motivation, attitudes preferences and
requirements
18. Distributions channels and marketing strategies
19. Product mix
20. Product life cycle
21. Administrative, technical and legal constraints.
22. Source of availability of materials
23. Government’s import and export policy
24. Quality of goods or services produced
25. 25. Market information system- source of marketing data: Primary data (market survey);
and Secondary data (available information in the books, journals and websites)
26. Pricing of product and services

In sum, the following issues should be highlighted in economic analysis:

a. Demand
- Domestic
- Export

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 b. Supply
- Domestic
- Import

c. Raw materials needs

- Domestic
- Import

D. Administrative / Managerial Study Area:

If the management is incompetent, even a good project may fail. It is necessary, therefore, to
evaluate the overall background of the promoters, their academic qualification, their business
and industrial experience, and their past performance.

The following issues should be considered in evaluating the managerial competence of a

project:

a. Internal organization
- Structure
- Authority
- Span of supervision
- Lines of communication
- Flexibility

b. External organization
- Govt. support
- Govt. regulations
- Funding (Appropriations)

c. Personnel
- Needs / capabilities
- Position descriptions
- Local verses foreign
- Policies

d. Management
- Management of the project
- Control techniques
- Scheduling techniques

E. Social Cost Benefit Analysis:

In case of certain rural projects like irrigation projects, power projects, transporting projects or other
infrastructural projects - national profitability (i.e., the net socio-economic benefits) considerations
are as important as, and sometimes more important than, commercial profitability considerations.
For evaluation of national or socio-economic benefits, the following aspects are generally
considered.

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 (i) Opportunity Cost: In the social cost benefit analysis the relevant cost is the opportunity cost.
The opportunity cost is the cost (i.e., the benefit) of the best alternative foregone due to a
particular course of action.

(ii) Shadow Prices: The prices of inputs and outputs of the project should be suitably corrected
to reflect the real cost, if the market prices are characterized by distortions of any type.
Shadow price, also known as accounting price, refers to such adjusted price of the
input/output so as to reflect its real cost or value. Thus a project should be updated for
evaluation through the use of shadow prices.

In addition to the above aspects socio-economic feasibility evaluation, a number of factors such as,
generation of employment, income distribution, self-reliance, development of small scale and
ancillary industries, development of infrastructure, improvement of quality of human life and so on
should be considered.

Indeed, it needs to examine the following things:

1. Contribution of projects towards savings by the nation, which is recycled in the form of
fresh investment to increase national income.
2. Creation of merit goods or services like parks, public entertainment places, roads and
highways, educational institutions etc.
3. Developing countries usually go for effective resources allocation and capital investment.
4. Development of infrastructure facilities needs SCBA rather than commercial profitability.
5. Impact of project on production of goods and services that is contribution to GDP and for
sustainable economic growth.
6. Impacts of the projects on redistribution of income should be examined.
7. International competition in international trade, globalization of business and formation
of regional trade blocs can only be taken care of with the help of SCBA
8. Impacts on poverty alleviation by creating employment as well as self-employment.
9. Impact on aggregate consumption.
10. Projects lead to enhancement of standard of living of the people.
11. Regional socioeconomic development
12. Exploration of hitherto unexplored mineral and natural resources.
13. Ensure a balance growth of agriculture and industries
14. Effects on macro management.
15. Effects manpower or human resources development.
16. Insure total quality management along with self-reliance in the economy.
17. Effects on trade deficit and adverse balance of payments.

In sum, the following issues should be analyzed in the social context of a project:

a. Social
- Individual well-being

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 - Social interactions
- Community well being

b. Social impact
- Culture and lifestyle
- Demography

c. Political impact
- Equity
- Social justice
- Political organization

d. Institutional resistance
- Legal constraints
- Stability of political support

F. Environmental Analysis:
Environmental and ecological analysis should be done particularly for the projects which have
significant impact on natural environment and ecological implications (polluting industries like-
bulk drugs, chemicals and lather processing). Two key points need to be considered are:

• Types of likely damage caused by project to environment

• Cost of restoration measures required to ensure that the damage to the environment is
contained within acceptable limit.

The following issues should be considered in environmental analysis:

a. Physical / chemical (pollution)

- Water
- Land
- Air
- Noise

b. Ecological
- Species and population
- Habitats and communities
- Ecosystem

c. Aesthetics (beautification)
- Land
- Air
- Water
- Biota
- Man made objects
- Overall composition

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Area of study is mostly dependent on the nature of a project. For instance, a project of
‘Development of Computer Software’ has neither impact on environment. Hence, it is not
required to conduct ‘environmental feasibility study’ of this project.

3.3 Concept of Project Proposal

A project proposal (PP) refers to an investment plan or a set of investment documents for
evaluation. A PP may be required to seek loan from the financial institutions, to get donation
from the donor agencies, to get sanction or subsidy from the higher authorities, for initial public
offering, and equity participation. A feasibility report is an added qualification for the
consideration of a PP. In a competitive environment, a feasibility report is a must for preparing
project proposal. The PP must be submitted with a cover or forwarding letter to the respective
institution.

3.4 Types of Project Proposal

Considering severity of technicalities, project proposal may be divided into two categories: (i)
Non-technical PP, and (ii) Technical PP.

3.4.1 Non-Technical PP: Conventional PPs prepared by the project initiators or organizational
staff may be refereed to as Non-Technical PP. No consultancy is required to prepare such a PP.
A promoter can develop a good non-technical PP based his previous experience, and intuition.

3.4.2 Technical PP: In most of the cases, a technical PP is prepared by the experts. There are a
number of consultancy firms established in the society to conduct feasibility study, and to
prepare technical PPs. A professionally developed consultancy organization can prepare a good
technical PP. A complete technical PP must cover eight study areas like a feasibility analysis
(discussed earlier). But a feasibility study must not be treated as a project proposal. A feasibility
report is considered as a pre-requisite of a technical project PP. A technical PP must consider
investment decision-making tools. Two categories of investment decision-making tools are
widely used in Bangladesh. These are: (a) Conventional – Payback Period and Ratio Analysis;
(b) Modern – NPV and IRR.

3.5 Purpose of Project Proposal:

 To seek loan from financial institution;
 To get donation from donor agencies;
 To get approval from government bodies;
 To get subsidies from higher authorities;
 To go for initial public offering;
 To go for equity participation.

3.6 Importance of Project Proposal:

 Helps in negotiation with the venture capitalists;
 Makes the firm better prepared for changes in the external environment;
 Gives brief idea about project’s goals and objectives;
 Gives a comprehensive idea about project activities;
 Provides the management a communication tool for outside financial sources as well as a
operational tool for guiding the project to success.

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  Qualifies objectivity, provides a measurable benchmarks for comparing forecast with
actual result
 Identifies critical risks and crucial events with a discussion of contingency plans that
provide opportunity for project’s success.
 May help management to avoid the project doom to failure.

3.7 Contents of Project Proposal

Contents of a project proposal are depended on the nature of the project. However, a complete
project proposal must cover the following areas:

a. Project summary
(Basic information of the project at a glance)
- Name of the project
- Location
- Status
- Authorized & paid capital
- Debt equity ratio / equity partners
- Basic product
- Production capacity
- Total project cost
- Total fixed cost
- Cost of imported machineries
- Cost of local machineries
- Total manpower required
- NPV & IRR of the project
- Scheduling / Gestation period

b. Company / Project overview -

- Mission statement
- Vision statement
- Key products / services
- Corporate strategy or objectives
- Management team

c. Operational Plan
- Overview of the products / services
- Facilities
- Production / manufacturing process
- Research and development
- Human resource plan
- Scheduling of the project

d. Market Analysis
- Potential customers
- Size and growth of market
- Competitor analysis

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 - SWOT analysis
- Risk analysis (unforeseeable barriers)

e. Marketing plan
- Sales and marketing
- Distribution plan
- Advertising / product promotion
- Customer service

f. Financial plan
- Assumptions
- Break Even Analysis
- Calculation of IRR & NPV
- Projected Cash Flow Statements
- Projected Balance Sheet
- Sensitivity analysis

______________________________________________________________________________
COURSE TEACHER:
Manjurul Alam Mazumder
Assistant Professor, DBA, IIUC
01816054012, [email protected].

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