UNIT-1 PROJECT FORMULATION

1. Project formulation

Project formulation refers to the development of the project from the generated idea of
the firm; the idea is the seed of the project.

Project Formulation

• Assessing the project idea

• Assessing project components

• Analyzing the components with the help of specialists

• Assessment of an investment proposal

1.2 Stages in Project Formulation

1. Feasibility Analysis

2. Technical Analysis

3. Economic Analysis

4. Project Planning & Design

5. Network Analysis

6. Input Analysis

7. Financial Analysis

8. Cost-Benefit Analysis

9. Pre-Investment Analysis

Feasibility Analysis:

• First stage in project formulation

• Examination to see whether to go in for a detailed investment proposal or not

 • Screening for internal and external constraints

Conclusion could be:

• The project idea seems to be feasible

• The project idea is not a feasible one

• Unable to arrive at a conclusion for want of adequate data

Techno-economic Analysis

1. Choice of Optimal Technology, Plan and Design etc.

2. Specifications and standards

3. Demand for the project output (goods/services)

4. Overall benefits

5. Provides platform for preparation of detailed project design

Project Design and Network Analysis

• It is the heart of the project

• It defines the sequence of events of the project

• Time and resources are allocated for each activity

• It is presented in the form of a network drawing/bar chart

• It helps to identify project inputs, finance needed and cost- benefit profile of the project

Input Analysis

• Its assesses the input requirements during the construction and operation of the project

• It defines the inputs required for each activity

• Inputs include materials, equipment, machines, software, human resources etc.

Financial Analysis

• Involves estimation of the project costs, operating cost and fund requirements

• It helps in comparing various project proposals on a common scale

 • Analytical tools used are discounted cash flow, IRR, cost-volume profit relationship and
ratio analysis

• Investment decisions involve commitment of resources in future

• It needs caution and foresight in developing financial forecasts

Cost- Benefit Analysis

• The overall worth of a project

• The project design forms the basis of evaluation

• Total costs and benefits there to (Benefits > Costs or B/C>1)

Pre-investment Analysis

• The results obtained in previous stages are consolidated to arrive at clear conclusions

• Helps the project-sponsoring body, the project-implementing body and the consulting
agencies to accept/reject the proposal

1.3 Capital Investment Definition

Capital Investment refers to any sum of money that is usually provided to a company to
help it achieve and further its business objective.

Advantages of Capital Investment

 Economic Boost
 Employment Generation.
 Efficiency in Markets and Competition
 Value Creation
 Wealth Creation
1.4 Tasks involved in Generation and Screening of a project idea

Generation and Screening of a project idea involves the following tasks:-

Generation of Ideas:
Generally project ideas are generated depending on:
 Consumer needs
 Market demand
 Resource availability
 Technology
 Natural calamity
 SWOT analysis
 Political considerations etc.,
(a) SWOT analysis – Identifying opportunities that can be profitably exploited
(b) Determination of objectives – Setting up operational objectives like cost reduction,
productivity improvement, increase in capacity utilization, improvement in contribution margin
(c) Creating Good environment – A good organizational atmosphere motivates employees to be
more creative and encourages techniques like brainstorming, group discussion etc. which results
in development of creative and innovative ideas.
Monitoring the Environment
Hence the firm must systematically monitor the environment and asses its competitive
abilities. For purposes of monitoring the business environment may be divided into six broad
sectors. They are as follows:
Economic Sector
 State of the economy
 Overall rate of growth
 Growth rate of primary, secondary, and territory sectors
 Cyclical fluctuations
 Linkage with the world economy
 Trade surplus/deficits balance of payment situation
Government Sector
 Industrial policy
 Government programs and projects
 Tax frame work
 Subsidies, incentives, and concessions
 Import and export policies
 Financing norms
 Lending conditions of financial institutions and commercial banks
Technological Sector
 Emergence of new technologies
 Access to technical know-how, foreign as well as local
 Receptiveness on the part of industry
Socio-demographic Sector
  Population trends
 Age shifts in population
 Income distribution
 Educational profile Employment of women
 Attitudes toward consumption and investment
Competition Sector
 Number of firms in the Industry
 Degree of homogeneity and differentiation among products
 Entry barriers
 Comparison with substitutes in terms of quality, price, appeal, and functional
performance
 Marketing policies and practices
Supplier Sector
 Availability and cost of raw materials
 Availability and cost of energy
Corporate Appraisal
The next big thing to do is the identification of corporate strength and weakness. This
scanning and identification of strength and weakness are termed as the corporate appraisal. It
also considers certain aspects to look upon:
 Market and distribution
 Production
 Operations
 Finance and accounting
 Research and development
 Human resources
Looking for Project Ideas
The process for scouting for project ideas is now to be executed. But before the process
begins one must know that from where he is going to scout ideas from. He must be aware of
some popular sources to look for ideas. Some of the potential sources are mentioned below.
 Plans of government
  Trade fairs
 Exhibitions
 Stimulation of creativity
 Local material and resources
 Financial institutions
 Development agencies
 Latest technologies

Preliminary Screening
 Compatibility with the promoter:
 Consistency with government priorities:
 Availability of inputs
 Adequacy of the market:
 Reasonableness of cost:
 Acceptability of risk level:
Project Rating Index
Project rating index seems to be important when it comes to handling a large number of
possible project ideas. A tool which helps us to evaluate a large number of project ideas. It also
helps us to simplify the process of preliminary screening. It makes sure that our efforts are in the
right direction and also helps us save time. There are certain steps involved in the calculation of
the project rating index.
 Identification of relevant project rating factors
 Assigning weight to factors( based upon importance )
 Rating of different project proposals on selected factors
 Multiply factor rating of projects with factor weights
 Add all factor scores
 Overall project rating of the project is obtained
Sources of Positive NPV
NPV stands for Net Present Value. To select a feasible and profitable project a project
manager should conduct a fundamental analysis of the product and also study the market to
know about the entry and exit barriers which lead to positive net present value.
 Entry barriers refer to the restrictions on issues which may hinder our entry to the market.
Studying about entry barriers and finding ways to overcome them is crucial. Some of the major
entry barriers are:
 Product differentiation
 Cost leadership
 Economies of scale
 Market reach
 Government policies
 Technology
Being an Entrepreneur/ Skills of the Entrepreneur
Entrepreneurs are not born but are made. It requires to acquire a number of skills over a
period of time to become an entrepreneur. Some of the skills required to become an entrepreneur
are mentioned below:
 Willing to make sacrifices
 Leadership qualities
 Quick decision making
 Rationality in thinking
 Believe in the project or whatever he is doing
 Able to tap opportunities
 Strong willpower to handle ups and downs in business
 Risk-taker
 Team player
1.5 Detailed project report
A detailed project report is a very extensive and elaborative outline of a project, which
includes essential information such as the resources and tasks to be carried out in order to make
the project turn into a success. It can also be said that it is the final blueprint of a project after
which the implementation and operational process can occur. In this comprehensive project
report, the roles and responsibilities are highlighted along with the safety measures if any issue
arises while carrying out the plan.
The following points play an essential role in deciding whether a project turns into success:
  Completion of the project within the stipulated period
 Priority to client satisfaction by delivering quality product after the completion of the
project
 Completion of the project within the set limits of escalation of cost
The blueprint design's focus has to be to convert the corporate investment into a project idea that
gives good monetary returns. A detailed project report depicts a practical viewpoint for the
implementation of the project. The requirements and risks should also be highlighted in a
detailed manner to prevent any troubles that can delay or halt the execution of the project. Hence
effective measures must also be stated so that the execution of the project can be carried out
hassle-free.
Contents of a detailed project report
 A detailed project report must include the following information:
 Brief information about the project
 Experience and skills of the people involved in the promotion of the project
 Details and practical results of the industrial concerns of the promoters of the project
 Project finance and sources of financing
 Government approvals
 Raw material requirement
 Details of the requisite securities to be given to various financial organizations
 Other important details of the proffered project idea include information about
management teams for the project, details about the building, plant, machinery, etc.

1.6 Different project clearances required

Here is the list of clearances and construction related documents required for any multi-story
residential project construction in general, which is also common for Chennai.
1. Project proposal submission – This includes location plan, site, layout and building plan
along with service plan which will be submitted to municipal authorities by the developer.
2. Coastal regulatory authority – Projects closer to the sea requires the approval from Coastal
Zone Management Authority office.
3. Excavation permission – This is required to excavate the land for the purpose of
construction.
4. NOC certificate from civic departments – No Objection Certificate involves clearances
from individual departments such as water and drainage, sewage, fire clearance,
archeological survey, tree authority, hydraulic, environmental and traffic & coordination
clearances.
5. Clearance certificate - The developer can apply for getting clearance certificate after NOCs
are cleared.
6. Permission for lift installation and operation – To install a lift, the developer has to get
permission from the public works department while the lift operation requires a separate
license.
7. Permission for Water Connectivity – In order to dig the ground for borewell, the developer
should get clearance from central ground water authority.
 UNIT-4
PROJECT FINANCE
4.1 What Is Project Finance?
Project finance is the funding (financing) of long-term infrastructure, industrial projects,
and public services using a non-recourse or limited recourse financial structure.
4.2 Means of financing
Means of financing means borrowing, use of cash balances, and certain other
transactions that are used to finance a deficit or a surplus. By definition, the means of financing
are not treated as receipts or outlays.
4.3 What Are the Various Stages of Project Financing?
1. Pre-Financing Stage
 Identification of the Project Plan - This process includes identifying the strategic plan of the
project and analyzing whether it’s plausible or not. In order to ensure that the project plan is
in line with the goals of the financial services company, it is crucial for the lender to
perform this step.
 Recognizing and Minimizing the Risk - Risk management is one of the key steps that should
be focused on before the project financing venture begins. Before investing, the lender has
every right to check if the project has enough available resources to avoid any future risks.
 Checking Project Feasibility - Before a lender decides to invest on a project, it is important
to check if the concerned project is financially and technically feasible by analyzing all the
associated factors.
2. Financing Stage
Being the most crucial part of Project Financing, this step is further sub-categorized into the
following:
 Arrangement of Finances - In order to take care of the finances related to the project, the
sponsor needs to acquire equity or loan from a financial services organization whose goals
are aligned to that of the project
 Loan or Equity Negotiation - During this step, the borrower and lender negotiate the loan
amount and come to a unanimous decision regarding the same.
 Documentation and Verification - In this step, the terms of the loan are mutually decided
and documented keeping the policies of the project in mind.
 Payment - Once the loan documentation is done, the borrower receives the funds as agreed
previously to carry out the operations of the project.
3. Post-Financing Stage
 Timely Project Monitoring - As the project commences, it is the job of the project manager
to monitor the project at regular intervals.
 Project Closure - This step signifies the end of the project.
 Loan Repayment - After the project has ended, it is imperative to keep track of the cash flow
from its operations as these funds will be, then, utilized to repay the loan taken to finance
the project.

4.4 Financial institution

A financial institution (FI) is a company engaged in the business of dealing with
financial and monetary transactions such as deposits, loans, investments, and currency
exchange.

NINE Major Types of Financial Institutions

1. Central Banks
Central banks are the financial institutions responsible for the oversight and management
of all other banks. In the United States, the central bank is the Federal Reserve Bank, which is
responsible for conducting monetary policy and supervision and regulation of financial
institutions.
Individual consumers do not have direct contact with a central bank; instead, large financial
institutions work directly with the Federal Reserve Bank to provide products and services to the
general public.
2. Retail and Commercial Banks
Traditionally, retail banks offered products to individual consumers while commercial
banks worked directly with businesses. Currently, the majority of large banks offer deposit
accounts, lending, and limited financial advice to both demographics.
Products offered at retail and commercial banks include checking and savings accounts,
certificates of deposit (CDs), personal and mortgage loans, credit cards, and business banking
accounts.
3. Internet Banks
A newer entrant to the financial institution market is internet banks, which work
similarly to retail banks. Internet banks offer the same products and services as conventional
banks, but they do so through online platforms instead of brick-and-mortar locations.
Under internet banks, there are two categories: digital banks and neo-banks. Digital banks are
online-only platforms affiliated with traditional banks. However, neobanks are pure digital
native banks with no affiliation to any bank but themselves. 2
4. Credit Unions
A credit union is a type of financial institution providing traditional banking services
and is created, owned, and operated by its members.
In the recent past credit unions used to serve a specific demographic per their field of
membership, such as teachers or members of the military. Nowadays, however, they have
loosened the restrictions on membership and are open to the general public.
Credit unions are not publicly traded and only need to make enough money to continue daily
operations. That's why they can afford to provide better rates to their customers than
commercial banks.
5. Savings and Loan Associations
Financial institutions that are mutually owned by their customers and provide no more
than 20% of total lending to businesses fall under the category of savings and loan associations .
They provide individual consumers with checking and accounts, personal loans, and home
mortgages.
Unlike commercial banks, most of these institutions are community-based and privately owned,
although some may also be publicly traded. The members pay dues that are pooled together,
which allows better rates on banking products.
6. Investment Banks
Investment banks are financial institutions that provide services and act as an
intermediary in complex transactions, for instance, when a startup is preparing for an initial
public offering (IPO), or in merges. They can also act as a broker or financial adviser for large
institutional clients such as pension funds.
Investment banks do not take deposits; instead, they help individuals, businesses and
governments raise capital through the issuance of securities. Investment companies,
traditionally known as mutual fund companies, pool funds from individuals and institutional
investors to provide them access to the broader securities market.
Global investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup,
Bank of America, Credit Suisse, and Deutsche Bank. Robo-advisors are the new breed of such
companies, enabled by mobile technology to support investment services more cost-effectively
and provide broader access to investing by the public.
7. Brokerage Firms
Brokerage firms assist individuals and institutions in buying and selling securities
among available investors. Customers of brokerage firms can place trades of stocks,
bonds, mutual funds, exchange-traded funds (ETFs), and some alternative investments.
8. Insurance Companies
Financial institutions that help individuals transfer the risk of loss are known as
insurance companies. Individuals and businesses use insurance companies to protect against
financial loss due to death, disability, accidents, property damage, and other misfortunes.
9. Mortgage Companies
Financial institutions specialized in originating or funding mortgage loans are mortgage
companies. While most mortgage companies serve the individual consumer market, some
specialize in lending options for commercial real estate only.
Mortgage companies focus exclusively on originating loans and seek funding from financial
institutions that provide the capital for the mortgages.
Many mortgage companies today operate online or have limited branch locations, which allows
for lower mortgage costs and fees.
4.5 Social cost benefit analysis
The social cost benefit analysis is a tool for evaluating the value of money, particularly
of public investments in many economies. It aids in decision making with respect to the various
aspects of a project and the design programmers of closely interrelated project. Social cost
benefit analysis has become important among economists and consultants in recent years.
Features of Social Cost Benefit Analysis
1. Assessing the desirability of projects in the public as opposed to the private
sector
2. Identification of costs and benefits
3. Measurement of costs and benefits
4. The effect of (risk and uncertainty) time in investment appraisal
5. Presentation of results – the investment criterion.
Stages of Social Cost Benefit Analysis of a Project
1. Determine the financial profitability of the project based on the market prices.
2. Using shadow prices for the resources to arrive at the net benefit of the project at
economic process.
3. Adjustment of the net benefit for the projects impact on savings and investment.
4. Adjustment of the net benefit for the projects impact on income distribution.
5. Adjustment of the net benefit for the goods produced whose social values differ
from their economic values.
Limitations of Social Cost Benefit Analysis
Social cost benefit analysis suffers from the following limitations.
1. The problems of qualification and measurement of social costs and benefits are
formidable. This is because many of these costs and benefits are intangible and their
evaluation in terms of money is bound to be subjective.
 2. Evaluation of social costs and benefits has been completed for one project, it may
be difficult to judge whether any other project would yield better results from the social
point of view.
3. The nature of inputs and outputs of projects involving very large investment and
their impact on the ecology and people of the particular region and the country as a whole
are bound to be differing from case to case.
4.6 Cost-benefit analysis
 A cost-benefit analysis (CBA) is the process used to measure the benefits of a decision
or taking action minus the costs associated with taking that action.
 A CBA involves measurable financial metrics such as revenue earned or costs saved as a
result of the decision to pursue a project.
 A CBA can also include intangible benefits and costs or effects from a decision such as
employee’s morale and customer satisfaction.
4.6.1 How to do Cost Benefit Analysis
When doing the cost-benefit analysis, there are two main methods of arriving at the
overall results. These are Net Present Value (NPV) and the Benefit-Cost Ratio (BCR).
1 – Net Present Value Model
The NPV of a project refers to the difference between the present value of the benefits
and the present value of the costs. If NPV > 0, then it follows that the project has economic
justification for going ahead.
It is represented by the following equation:
NPV = ∑ Present Value of Total Future Benefits – ∑ Present Value of Total Future Costs
2 – Benefit-Cost Ratio
On the other hand, the Benefit-Cost provides value by calculating the ratio of the sum of
the present value of the benefits associated with a project against the sum of the present value of
the costs associated with a project.
BCR = ∑ Present Value of Total Future Benefits / ∑ Present Value of Total Future Costs
The greater the value above 1, the greater are the benefits associated with the alternative
considered. If using the Benefit-Cost Ratio, the analyst has to choose the project with the
greatest Benefit-Cost Ratio.
Steps of Cost-Benefit Analysis
The steps to create a meaningful Cost-Benefit Analysis model are:
1. Define the framework for the analysis.
Identify the state of affairs before and after the policy change or investment on a
particular project. Analyze the cost of this status quo. We need to first measure the profit of
taking up this investment option instead of doing nothing or being on ground zero. Sometimes
the status quo is the most lucrative place to be in.
2. Identity and classify costs and benefits.
It is essential to costs and benefits are classified in the following manner to ensure that
you understand the effects of each cost and benefit.
– Direct Costs (Intended Costs/Benefits)
– Indirect Costs (Unintended Costs/Benefits),
– Tangible (Easy To Measure and Quantify)/
– Intangible (Hard To Identify and Measure), And
– Real (Anything That Contributes To the Bottom Line Net-Benefits)/Transfer (Money
Changing Hands)
3. Drawing a timeline for expected costs and revenue.
When it comes to decision making, timing is the most crucial element. Mapping needs to
be done when the costs and benefits will occur and how much they will pan out over a phase. It
solves two major issues. Firstly, a defined timeline enables businesses to align themselves with
the expectations of all interested parties. Secondly, understanding the timeline allows them to
plan for the impact that the cost and revenue will have on the operations. This empowers
businesses to better manage things and take steps ahead of any contingencies.
4. Monetize costs and benefits.
We must ensure to place all costs and all benefits in the same monetary unit.
5. Discount costs and benefits to obtain present values.
It implies converting future costs and benefits into present value. It is also known as
discounting the cash flows or benefits by a suitable discount rate. Every business tends to have a
different discount rate.
6. Calculate net present values.
It is done by subtracting costs from benefits. The investment proposition is considered
efficient if a positive result is obtained. However, there are other factors to be considered, as
well.
4.6.2 Principles of Cost-Benefit Analysis
 Discounting the costs and benefits – The benefits and costs of a project have to be expressed
in terms of equivalent money of a particular time. It is not just due to the effect of inflation but
because a dollar available now can be invested, and it earns interest for five years and would
eventually be worth more than a dollar in five years.
 Defining a particular study area – The impact of a project should be defined for a particular
study area. E.g., A city, region, state, nation, or the world. It’s possible that the effects of a
project may “net out” over one study area but not over a smaller one.
 The specification of the study area may be subjective, but it can impact the analysis to a
significant extent.
 Addressing uncertainties precisely – Business decisions are clouded by uncertainties. It
must disclose areas of uncertainty and discretely describe how each uncertainty, assumption, or
ambiguity has been addressed.
 Double counting of cost and benefits must be avoided – Sometimes though each of the
benefits or costs is seen as a distinct feature, they might be producing the same economic value,
resulting in the dual counting of elements. Hence these need to be avoided.

4.6.3 Importance of Cost-Benefit analysis

 Determining the feasibility of an opportunity:
 To provide a basis for comparing projects:
  Evaluating Opportunity Cost:
 Performing

4.6.4 Limitations
Few of the limitations are:
 Inaccuracies in quantifying costs and benefits
 An element of subjectivity
 Cost-Benefit analysis might be mistaken for a project budget
 Ascertaining the discount rate

4.7 Key performance indicators

 Key performance indicators (KPIs) measure a company's success versus a set of targets,
objectives, or industry peers.
 KPIs can be financial, including net profit (or the bottom line, gross profit margin),
revenues minus certain expenses, or the current ratio (liquidity and cash availability).
4.7.1 What Is a Good KPI?
A good KPI has the following attributes:
 Provides objective and clear information of progress towards an end-goal
 Tracks and measures factors such as efficiency, quality, timeliness, and performance
 Provides a way to measure performance over time
 Helps make more informed decisions
4.7.2 How Do Create a KPI REPORT?
Follow these general steps to create a KPI report:
1. Create an overview or introduction
2. Clearly define the KPIs
3. Present your KPIs using appropriate graphs, charts, and tables
4. Make final edits to the report and distribute
4.7.3 BASIC TYPE OF FINANCIAL KPI
 UNIT-V

` PRIVATE SECTORS PARTICIPATION

5.1 PRIVATE PARTICIPATION IN INFRASTRUCTURES

PPPs (Public Private Participants) use a combination of public and private funds in order
to finance the costs of infrastructure projects. The private sector rises capital funding for a
project through equity and debt finance.
Sector in which PPP have been completed worldwide include:
 Power generation and distribution
 Water and sanitation
 Pipelines
 Hospitals
 Stadium
 Railways
 Road
 Housing
Motivation for engaging in PPP
They are 3 main needs that motivate governments to enter into PPP for infrastructure
 To attract private capital investment
 To increase efficiency and use available resources more effectively.
 To reform sector through a reallocation of roles incentives and accountability.
Benefits of PPP
 PPP Improves the quality and quantity of basic infrastructure.
 Work can be completed within the planed budget.
 PPP structures the Risk of performance is transferred to the private sector.
 Better quality in Design and Construction.
 PPP project can deliver better value for Money.
 PPP are creating good working relationship between public and private sector.
 Improve Economic growth.
  Ensure Timely provision of public service.
Generic PPP project sequence

Decision to enter PPP process

Determine the priority projects

Sector diagnostic and Sector Road Map

Select and assign

transaction advisory team

Select PPP option

PPP preparation/Feasibility/Legal/Technical/Financial
procurement process

Publication/Announcement

PPP Prequalification

Prepare Bidding package Terms

Bid Evaluation and Award

Negotiation and Contract signing

5.2 BOT- (Build Operate Transfer)
It is type of arrangement in which the private sector builds an infrastructure projects,
operates and maintain for a certain period of time before transferring the infrastructure to the
government.
5.3 BOOT – Build, Own, Operate and Transfer Schemes
In this constructor builds the project, they then get to own and operate it for some
period of time like 20 or 25 years during which they collect revenues. At the end they handed
back over to the government.
List of the Advantages of Build-Own-Operate-Transfer
1. It minimizes the public cost for infrastructure development.
Using the BOOT model, the public sector is able to take advantage of the efficiencies
found in the private sector for a minimal investment. Many PPP relationships using this model
will offer an incentive, such as tax breaks, to the private organization to develop the
infrastructure.
2. It reduces public debt.
Private companies assume the debts involved in the initial phases of a BOOT
relationship. Even in PPP structures where some initial funding may be provided by the public
sector, the majority of the initial development cost will be the responsibility of the private
organization. This allows the public sector to maintain a balanced budget while reducing its
influence in how the new infrastructure is developed.
3. It allows for innovation.
The public sector brings in the best private contractors possible when developing
infrastructure using the BOOT model. This process encourages innovation, which allows the
community to benefit from advanced technologies which would be included with the project.
4. It provides a chance to bring in expertise.
The public sector is tasked with the need to bring in the best possible private companies
to complete the contract. If the necessary expertise is not available locally, then national or
international private enterprises might be brought in to create the required infrastructure.
5. It allows each party to focus on their strengths.
In the BOOT model, the private and public sectors are able to both focus on what they do
best. That allows projects to be completed faster, often with reduce delays, because the public
sector provides structure and cost containment, while the private sector provides efficiencies and
resource access.
6. It keeps public-sector funds where they are most needed.
Because the private sector is managing the funding aspect of the project, the public sector
is able to direct resources to other areas of socioeconomic welfare required by the community.
7. It is a process that is fully appraised.
If there is one constant in the world today, it is that the word of a government official or
program is not always accurate. By bringing in a private enterprise to develop the project, more
trust can be brought into the process to avoid any unrealistic expectations or promises from being
released to the community.
List of the Disadvantages of Build-Own-Operate-Transfer
1. It can have higher transaction costs.
Although the purpose of a BOOT structure is to limit the cost liabilities to the public
sector, this type of transaction cost can be higher than other contract opportunities.
2. It only works for large projects.
 The BOOT model is only suitable for large-scale infrastructure projects within a
community. It is not a suitable PPP for most of the smaller projects that communities tend to
need development help with each year.

3. It requires fund-raising to be successful.

The private sector will not get started on the infrastructure project until there are funds in
place to begin the planning phase of the project. If no funds can be raised to complete the project,
then it won’t get done.
4. It may require substantial operational revenues to be successful.
For the BOOT model to be successful from a private standpoint there must be large
revenues generated during the operational phase of the contract. That is why BOOT contracts
have such a lengthy transfer stipulation.
5. It requires strong corporate governance.
In this PPP relationship, the public sector must stay involved with the supervision of the
project during the ownership phase to ensure it remains successful.
6. It can place the public sector at a disadvantage.
If the public sector has limited expertise in the infrastructure matters being considered,
then the private sector can take advantage of that fact. Both sides must have knowledge of the
complexity, competitiveness, and risks involved to ensure a balanced relationship is possible.

5.4 BOLT: BUILD OWN LEASE AND TRANSFER

In this approach, the government gives a concession to a private entity to build a facility
(and possibly design it as well), own the facility, lease the facility to the public sector and then at
the end of the lease period transfer the ownership of the facility to the government.
Policies/Regulatory Framework
Using BOLT model for social infrastructure, following policies must be followed by both
public and private parties.
 After the identification of the project, the selection of private party should be purely based
on negotiations rather than contract bidding.
  The government has to disclose the detail drawing and specifications of materials to be
used. Also the duration of the completion of project is to be specified in the agreement.
 The private party should be selected through the negotiations from the contenders who
satisfies the required criteria as well as have fair experience in such projects.
 The contender giving the least estimate should not be preferred always but the one giving
the best quality of work within the stipulated time should be selected.
 During the construction stage, the State Government agency should monitor the work as
per the design drawings and specifications.
 In case of delay in the construction work of project within the stipulated time, the private
party may be penalized as per the concession agreement.
 The lease period of the project should start immediately after the project enters into its
operational stage.
 The concession period should be between 5-15 years.
 The rate of return to the private body should be at least 15-20 percent per annum according
to the type of project.
 Provision of financial security should be there in the concession agreement in case of
failure of payment of lease amount of government.
 In any case, including the change of the ruling party there should not be any alteration in
concession agreement and the project cannot be terminated before the concession period.
 In case of natural calamities the duration of the construction stage can be altered.
 At the end of concession period the agreement is terminated and final ownership is
transferred to the government.

5.5 TECHNOLOGY TRANSFER

International technology transfer is a multilateral flow of information and technical
knowledge. It integrates various scientific fields, institutions, and business entities.
Research transforms money into knowledge … technology transfer transforms
knowledge into money.”
Types of Technology Transfer
Technology transfer can be categorized into three basic types:
 1. Technology push. This takes place when a company or university patents its invention
and licenses it to other companies. This process is common with university-related
inventions because universities are not in charge of manufacturing the inventions
themselves, but they want to get their inventions out into the market
2. Market pull. This is when new technologies are developed in response to demand for a
product or service. This is the most common way of technology transfer as it pulls up
innovation in order to meet the demands of the market.
3. Technological spillover. This takes place when new advances in one area stimulate
progress in another. It’s called a “spillover” because it’s like ideas spilling from one
subject to another, or technology being transferred between countries.
Advantages of Technology Transfer
 Develops a platform to share ideas.
 Protects intellectual property.
 Promotes economic development through commercializing innovative technology.
 Enhances collaboration between the federal and non-federal science.
 UNIT-2

PROJECT COSTING

2.1 CASH FLOW ANALYSIS

CASH FLOW – It is nothing but flow of cash through the organization over period of time.
Cash flow types

Cash flow

Operating activity Investing activity Finance activity

Operating activity
It includes the production, sales and delivery of the company product as well as
collecting payments from its customers.
Investing activity
It includes purchases or sales of assets (land, building, equipment etc) loans made
to suppliers or received from customers and payment related to mergers and acquisitions.
Financing activity
It includes the inflow of cash from investor, such as banks and shareholders and
outflow of cash to shareholders as dividends as the company generates income.
Elements of cash flow
 Inventory
 Account payable
 Account receivable
 Cast

Inventory
It is nothing but ledger book. It shows current status of cash flow and also material
status.

Work in
progress

Raw Inventory Finished

materials goods

Account payable
To provide records of bills received from vendors, material suppliers, subcontractors
and other parties.
Account receivable
It is opposite function of account payable. Amount received from clients and other
parties.
Cash
Cash is important one to run the project successfully. Cash flow statement shows the
cash inflow and out flow statement of the organization.
Short of cash in organization due to
 Spending on materials before goods sales
 Purchase of capital equipment
 Delay in Customers payment
  Tax payment etc.
Cash flow analysis is done by Two Methods
 Direct method – in this method grouping cash payment together and showing total
movements in cash over a particular period.
 In direct method – it is slightly more difficult to understand initially but has far more
potential for analysis.

Example for cash flow statement

Cash flow for operating activity

Cash receipts from customers 9500

Cash paid to suppliers and employees 2000

Cash generated from operation 7500

Tax paid 2000

Net cash flows 5500

Cash flows from investing activities

Sale of equipment 7500

Purchase of fixed assets (land) 2000

Dividends received 1000

Net cash 6500

Cash flow from financing activities

Dividends paid 2500

Interest paid 1000

Net cash used in financing activity 3500

Net increase in cash and cash 8500

 equivalents

2.2 TIME VALUE OF MONEY

Time Value of Money (TVM) is a fundamental financial concept, stating that the current
value of money is higher than its future value, given its potential to earn in the years to come.
Thus, it suggests that a sum of money in hand is greater in value than the same sum of money
received in the next couple of years.

Formula
The Time Value of Money formula is expressed below:
 OR

Here,
PV = Present value of money
FV = Future value of money
i = Rate of interest or current yield on similar investment
t = No. of years
n = No. of compounding periods of interest each year

2.2.1 PRESENT VALUE OF MONEY

Present value is the concept that states an amount of money today is worth more
than that same amount in the future.

PV = present value
FV = future value
r = rate of return
{n} = number of periods
Example: How much do I need to invest at 8% per year, in order to have $10,000 in__.
r = 0.08
Ten years PV = $10,000 ÷ (1.08)10 = $10,000 ÷ 2.1589 = $4,632
2.2.2 Future Value (FV)
Future value (FV) is the value of a current asset at a future date based on an assumed
rate of growth. The future value is important to investors and financial planners, as they use it to
estimate how much an investment made today will be worth in the future.
Future value formula

FVn =PV× (1+k)n

Where,
 FVn = future value at the end of period n

PV = present value

k = annual rate of interest

n = number of periods

This is our formula for the future value of a current amount n years in the future, at interest rate k.

Example: How much is $10,000 worth 6 years from now if the interest rate is 5%?

PV=$10,000, k =0.05, n = 6. Using our formula, FV6 = $10,000(1.05)6

= $13,400.96.

2.2.3 ANNUITY
An annuity is a contract between you and an insurance company in which you make a
lump-sum payment or series of payments and, in return, receive regular disbursements,
beginning either immediately or at some point in the future.
Types of Annuities
Annuities come in three main varieties: Fixed, variable, and indexed. Each type has its
own level of risk and payout potential. For any of these, it is often structured as a deferred
annuity.
Fixed
Fixed annuities pay out a guaranteed amount. This type of annuity comes in two
different styles—fixed immediate annuities, which pay a fixed rate right now, and fixed
deferred annuities, which pay you later. The downside of this predictability is a relatively
modest annual return, generally slightly higher than a certificate of deposit (CD) from a bank.
Variable
Variable annuities provide an opportunity for a potentially higher return, accompanied
by greater risk. In this case, you pick from a menu of mutual funds that go into your personal
"sub-account." Here, your payments in retirement are based on the performance of investments
in your sub-account.
Indexed
 Indexed annuities fall somewhere in between when it comes to risk and potential reward.
You receive a guaranteed minimum payout, although a portion of your return is tied to the
performance of a market index, such as the S&P 500.
Despite their potential for greater earnings, variable and indexed annuities are often criticized
for their relative complexity and their fees. Many annuitants, for example, have to pay
steep surrender charges if they need to withdraw their money within the first few years of the
contract.

2.3 COST OF CAPITAL

Cost of capital represents the return a company needs to achieve in order to justify
the cost of a capital project, such as purchasing new equipment or constructing a new building.
2.3.1 IMPORTANCE COST OF CAPITAL
1. Designing the capital structure: The cost of capital is the significant factor in designing a
balanced and optimal capital structure of a firm. While designing it, the management has to
consider the objective of maximizing the value of the firm and minimizing cost of capital.
2. Capital budgeting decisions: The cost of capital sources as a very useful tool in the process
of making capital budgeting decisions.
3. Comparative study of sources of financing: There are various sources of financing a
project. Out of these, which source should be used at a particular point of time is to be decided
by comparing costs of different sources of financing.
4. Evaluations of financial performance: Cost of capital can be used to evaluate the financial
performance of the capital projects. Such as evaluations can be done by comparing actual
profitability of the project undertaken with the actual cost of capital of funds raise to finance
the project.
5. Knowledge of firms expected income and inherent risks: Investors can know the firms
expected income and risks inherent there in by cost of capital.
6. Financing and Dividend Decisions: The concept of capital can be conveniently employed as
a tool in making other important financial decisions.
2.3.2 VARIOUS TYPES OF COST OF CAPITAL
i. Explicit Cost of Capital:
Explicit cost of any source may be defined as the discount rate that equates the present
value of the funds received by a firm with the present value of expected cash outflows.
ii. Implicit Cost of Capital:
The implicit cost may be defined as the rate of return associated with the best investment
opportunity for the firm and its shareholders that will be foregone if the project under
consideration by the firm is accepted. If a firm retains its earnings, implicit cost will be the
income, the shareholders could have earned if such earnings would have been distributed and
invested by them elsewhere.

iii. Specific Cost of Capital:

The cost of each component of capital is known as specific cost of capital. A firm raises
capital from different sources such as equity, preference, debentures, etc. Specific cost of capital
is the cost of equity share capital, cost of preference share capital, cost of debentures, etc.,
individually.
iv. Weighted Average Cost of Capital:
The weighted average cost of capital is the combined cost of each component of funds
employed by the firm. The weights are the proportion of the value of each component of capital
in the total capital.
v. Marginal Cost of Capital:
Marginal cost is defined as the cost of raising one extra rupee of capital. It is also called
the incremental or differential cost of capital. It refers to the change in overall cost of capital
resulting from the raising of one more rupee of fund. In other words, it is described as the
relevant cost of new funds required to be raised by the company.
2.4 COST OF DEBT
 The cost of debt is the effective interest rate that a company pays on its debts, such as
bonds and loans. The cost of debt can refer to the before-tax cost of debt, which is the company's
cost of debt before taking taxes into account, or the after-tax cost of debt.
Formula

Example
Simple Cost of Debt
If you only want to know how much you’re paying in interest, use the simple formula.
Total interest / total debt = cost of debt
If you’re paying a total of $3,500 in interest across all your loans this year, and your total
debt is $50,000, your simple cost of debt is 7%
$3,500 / $50,000 = 7%
Complex Cost of Debt
But let’s say you do care about how your cost of debt changes after taxes.
Effective interest rate * (1 – tax rate)
Let’s go back to that 6.5% we calculated as our weighted average interest rate for all loans.
That’s the number we’ll plug into the effective interest rate slot.
Let’s say you have a 9% corporate tax rate. Here’s how your cost of debt formula would look.
6.5% (or .065) * (1-.09) = .591 or 5.9%
So after tax savings, your cost of debt is 5.9%.
2.5 COST OF EQUITY
Cost of equity is the return that a company requires for an investment or project, or
the return that an individual requires for an equity investment.
Cost of Equity formula can be calculated through below two methods:
 Method 1 – Cost of Equity Formula for Dividend Companies
 Method 2 – Cost of Equity Formula using CAPM Model

Method 1:

DPS = Dividend per Share

MPS = Market Price per Share

r = Growth rate of Dividends

Model: 2

Where,

R(f) = Risk-Free Rate of Return

β = Beta of the stock

E(m) = Market Rate of Return

[E(m)-R(f)] = equity risk premium

2.6 COST OF PREFERENCE SHARE CAPITAL

 The cost of preference share capital is the dividend committed and paid by the company.
This cost is not relevant for project evaluation because this is not the cost of obtaining additional
capital. To determine the cost of acquiring the marginal cost, we will be finding the yield on the
preference share based on the current market value of the preference share.
2.7 COST OF CAPITAL CALCULATION:

Cost of Capital = (Weightage of Debt * Cost of Debt) + (Weightage of

Preference Shares * Cost of Preference Share) +
(Weightage of Equity * Cost of Equity)

Calculation of Cost of Capital (Step by Step)

1. Find the Weightage of Debt
The weight of the debt component is computed by dividing the outstanding
debt by the total capital invested in the business, i.e., the sum of outstanding debt, preferred
 stock, and common equity. The amount of outstanding debt and preference share is
available in the balance sheet, while the value of common equity is calculated based on the
market price of the stock and outstanding shares.

Weightage of debt = Amount of outstanding debt Total capital

Total capital = Amount of outstanding debt + Amount of Preference share + Market

value of common equity
2. Find the Cost of debt
The cost of debt is calculated by multiplying the interest expense charged on the debt with
the inverse of the tax rate percentage and then dividing the result by the amount of outstanding
debt and expressed in terms of percentage. The formula for the cost of debt is as follows:
Cost of debt = Interest Expense * (Tax Rate) Amount of outstanding debt
3. Find the Weight of the Preference Share
The weight of the preference share component is computed by dividing the amount of
preference share by the total capital invested in the business.
Weightage of Preference Share = Amount of preference share Total capital
4. Find the Cost of Preferred Stock
The cost of preferred stock is simple, and it is calculated by dividing dividends on
preference share by the amount of preference share and expressed in terms of percentage. The
formula for the cost of preference share is as follows:
Cost of Preference Share = Dividend on preference share Amount of Preferred Stock
5. Determine the Weightage of Equity
The weight of the common equity component is computed by dividing the product of a
market value of stock and outstanding number of shares (market cap) by the total capital invested
in the business.
Weightage of Equity = Market value of common equity Total capital
6. Find the Cost of Equity
The cost of equity is composed of three variables- risk-free return, an average rate of
return from a group of a stock representative of the market, and beta, which is a differential
return that is based on the risk of the specific stock in comparison to the larger group of stocks.
The cost of equity is expressed in terms of percentage, and the formula is as follows:
Cost of Equity = Risk-Free Return + Beta * (Average Stock Return Risk-Free Return)

UNIT-III

PROJECT APPRAISAL

3.1 NET PRESENT VALUE (NPV)

Net present value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time.
The Formula for NPV

If there’s one cash flow from a project that will be paid one year from now, then the
calculation for the NPV is as follows:

3.2 INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present value
(NPV) of all cash flows equal to zero in a discounted cash flow analysis.
PAYBACK PERIOD
The payback period is the time required to recover the initial cost of an investment. It is
the number of years it would take to get back the initial investment made for a project.

Merits of Payback Period

1. It is very simple to calculate and easy to understand.
2. This method is helpful to analyze risk, i.e. to determine how long the investments
will be at risk.
3. It is beneficial for the industries where the investments become obsolete very quickly.
4. It measures the liquidity of the projects.
Demerits of Payback Period
1. The major drawback of this method is that it ignores the Time Value of Money.
2. It does not take into consideration the cash flows that occur after the payback period.
3. It does not show the liquidity position of the company, but only tells the ability of a
project to return the initial outlay.
4. It does not measure the profitability of the entire project since it only focuses on the
time required to recover the initial investment cost.
5. This method does not consider the life-span of investment, what if the life of an asset
gets over very much before the initial investment cost is realized.
INDIAN PRACTICE OF INVESTMENT APPRAISAL
Investment appraisal is a way that a business will assess the attractiveness of possible
investments or projects based on the findings of several different capital budgeting and financing
techniques.
NEED FOR APPRAISAL
(i) involve large amount of funds
(ii) involve greater amount of risk on account of unforeseen situation and
(iii) Often mean irreversibility once the investment decision is made.
METHODS OF APPRAISAL
These techniques are classified into 2 parts, that is,
 Discounted cash flow techniques and
 Non-discounted cash flow techniques.
Non-Discounted Cash Flow Techniques Under non-discounted cash flow techniques, future
cash flows are not discounted to arrive at their present value.
The following two techniques are classified under the head of non-discounted cash flow
techniques:
1. Payback period
2. Accounting rate of return
Discounted Cash Flow Techniques
Discounted cash flow (DCF) techniques calculate the present value of cash flows to be
received in the future. The following are classified under discounted cash flow techniques:
 Net present value
 Internal rate of return
 Profitability index
 Discounted payback period
Payback Period
One of the simplest investment appraisal techniques is the payback period. The
payback technique states how long does it take for the project to generate sufficient cash flow to
cover the initial cost of the project.
Accounting Rate of Return Method
Accounting rate of return is an accounting technique to measure profit expected from
an investment. It expresses the net accounting profit arising from the investment as a percentage
of that capital investment. It is also known as return on investment or return on capital.
The formula of ARR is as follows:
ARR= (Average annual profit after tax / Initial investment) X 100
Net Present Value
 It is the most popular method of investment appraisal. Net present value is the sum of
discounted future cash inflows & outflows related to the project. This method lays importance on
the time value of money and is in line with the company’s objective to maximize shareholders’
wealth. Generally, the weighted average cost of capital (WACC) is the discounting factor for
future cash flows in the net present value
Internal Rate of Return Method
An internal rate of return is the discounting rate, which brings discounted future cash
flows at par with the initial investment. In other words, it is the discounting rate at which the
company will neither make a loss nor make a profit. We can also call this rate as the yield on
investment and the marginal efficiency of capital.
It is obtained by the trial & error method. We can also state that IRR is the rate at which the NPV
of the project will be zero.
I.e. Present value of cash inflow – Present value of cash outflow = zero
Profitability Index
The profitability index defines how much you will earn per dollar of investment. The
present value of an anticipated future cash flow divided by initial outflow gives the profitability
index (PI) of the project. It is also one of the easy investment appraisal techniques.
Suppose, the present value of anticipated future cash flow is $ 120,000 & the initial outflow is $
100,000. Then the profitability index is 1.2. i.e. $ 120,000 / $ 100,000. This means each invested
dollar is generating revenue of 1.2 dollars. If the profitability index is more than 1, the project
should be accepted & if it is less than 1 it should be rejected.
If we reduce complications, it is nothing but a different presentation of NPV.
Discounted Payback Period Method
Discounted payback period method is the same as the payback period method. The only
difference is, in discounting payback method is that the payback period is calculated on the basis
of discounted future cash-flows while in the payback method it is calculated on the basis of
future cash-flows.

INTERNATIONAL PRACTICE OF INVESTMENT APPRAISAL

“Follow same notes given in above topic”
ISSUES IN INTERNATIONAL PROJECT APPRAISAL
Appraisal of international projects involve quite a few more complexities than domestic
Projects. The variables that are unique to international project appraisal are as follows
a. Cash flow from foreign projects may be subject to various restrictions that are imposed by the
host country.
b. Initial investment in the host country may benefit front a partial or total release of blocked
funds.
c. Cash flows from foreign projects must be converted into the currency of the parent firm.
d. Cash flows generated from foreign projects may replace revenue producing exports to the host
country.
e. Profits generated from projects undertaken in other countries are subject to two taxing
jurisdiction: the host country and the parent country.
f. Profitability of foreign projects may be enhanced from concessiorlary financing arrangements
and other benefits provided by the host country.
g. Foreign investment may contribute to the corporate overall strategy of growth and gaining
foothold in markets to prompt competitors.
h. Foreign investment may produce diversification benefits to shareholders of tile parent firm.
i. Terminal value is more difficult to estimate than in the case of domestic projects.
Such value to the parent company may differ from the valuation put on the facilities by potential
buyers in the host country or from third countries.

RISK ANALYSIS
Risk analysis is the process of identifying and analyzing potential issues that could
negatively impact key business initiatives or projects. This process is done in order to help
organizations avoid or mitigate those risks.
Why is risk analysis important?
Enterprises and other organizations use risk analysis to:
 anticipate and reduce the effect of harmful results from adverse events;
 evaluate whether the potential risks of a project are balanced by its benefits to aid in the
decision process when evaluating whether to move forward with the project;
 plan responses for technology or equipment failure or loss from adverse events, both natural
and human-caused; and
 Identify the impact of and prepare for changes in the enterprise environment, including the
likelihood of new competitors entering the market or changes to government regulatory
policy.
Benefits of risk analysis
 identify, rate and compare the overall impact of risks to the organization, in terms of both
financial and organizational impacts;
 identify gaps in security and determine the next steps to eliminate the weaknesses and
strengthen security;
 enhance communication and decision-making processes as they relate to information
security;
 improve security policies and procedures and develop cost-effective methods for
implementing these information security policies and procedures;
 put security controls in place to mitigate the most important risks;
 increase employee awareness about security measures and risks by highlighting best
practices during the risk analysis process; and
 Understand the financial impacts of potential security risks.
DIFFERENT METHODS OF RISK ASSESSMENT
There are several methods of risk assessment which can help identify risk, assess the risk
appropriately and help in the risk management.
Some of these most used methods of risk assessment include:
1. What-if analysis
2. Fault tree analysis (FTA)
3. Failure mode event analysis (FMEA)
4. Hazard operability analysis (HAZOP)
5. Incident BowTie
6. Event Tree
1. What-if analysis
 What-If Analysis is to identify hazards, hazardous situations, or specific event sequences
that could produce undesirable consequences. The method can involve examination of possible
deviations from the design, construction, modification, or operating intent. It requires a basic
understanding of the process intention, along with the ability to mentally combine possible
deviations from the design intent that could result in an incident. This technique is really
successful when the members of the team involved in the analysis are well experienced.
2. Fault tree analysis (FTA)
A Fault Tree is a vertical graphic model that displays the various combinations of
unwanted events that can result in an incident. The diagram represents the interaction of these
failures and events within a system. Fault Tree diagrams are logic block diagrams that display
the state of a system (Top Event) in terms of the states of its components (basic events). A Fault
Tree diagram is built top-down starting with the Top Event (the overall system) and going
backwards in time from there. It shows the pathways from this Top Event that can lead to other
foreseeable, undesirable basic events. Each event is analyzed by asking, “How could this
happen?” The pathways interconnect contributory events and conditions, using gate symbols
(AND, OR). AND gates represent a condition in which all the events shown below the gate must
be present for the event shown above the gate to occur. An OR gate represents a situation in
which any of the events shown below the gate can lead to the event shown above the gate.

3. Failure mode event analysis (FMEA)

Failure mode event analysis (FMEA) can also be known as potential failure modes and
effects analysis; failure modes, effects and criticality analysis (FMECA).
Failure modes and effects analysis (FMEA) is a step-by-step approach for identifying all possible
failures in a design, a manufacturing or assembly process, or a product or service.
Failure modes mean the ways, or modes, in which something might fail. Failures are any errors
or defects, especially ones that affect the customer, and can be potential or actual.
Effects analysis refers to studying the consequences of those failures.
Failures are prioritized according to how serious their consequences are, how frequently they
occur and how easily they can be detected. The purpose of the FMEA is to take actions to
eliminate or reduce failures, starting with the highest-priority ones.
Failure modes and effects analysis also documents current knowledge and actions about the risks
of failures, for use in continuous improvement. FMEA is used during design to prevent failures.
Later it’s used for control, before and during ongoing operation of the process. Ideally, FMEA
begins during the earliest conceptual stages of design and continues throughout the life of the
product or service.
4. Hazard operability Analysis (HAZOP)
Hazard and Operability Analysis (HAZOP) is a structured and systematic technique for
system examination and risk management. In particular, HAZOP is often used as a technique for
identifying potential hazards in a system and identifying operability problems likely to lead to
nonconforming products. HAZOP is based on a theory that assumes risk events are caused by
deviations from design or operating intentions. Identification of such deviations is facilitated by
using sets of “guide words” as a systematic list of deviation perspectives. This approach is a
unique feature of the HAZOP methodology that helps stimulate the imagination of team
members when exploring potential deviations.
5. Incident BowTie
The ‘Incident BowTie’ analysis method combines two analysis methods; BowTie risk
analysis and Tripod incident analysis. The method brings the advantages of both worlds together.
The information from the BowTie analysis can be used as input for the incident analysis, viewing
it from a broader perspective and making sure all the possible scenarios are taken into account.
The input from the Tripod incident analysis can be used to make the BowTie analysis more
realistic and up to date, using real-life data. It creates an extra layer in the BowTie diagram,
making it possible to add more specific information to the risk analysis. The two methods have
an important similarity in the analysis technique; the barriers. For both methods barriers are used
to show what is done to prevent incidents or events (BowTie) or to show where the failures lie
(Tripod). To build an ‘Incident BowTie’ diagram the items from both methods are connected on
the level of the barriers, making it possible to collect information about those barriers from two
viewpoints.
6. Event Tree analysis
The Event Tree analysis method is a bottom-up inductive method. It makes use of
general information to analyze specific information. The diagram that is built gives a horizontal
graphical representation of the logic model that identifies the possible outcomes following an
initiating event. The event sequence is influenced by either success or failure of the applicable
barriers or safety functions/systems. The event sequence leads to a set of possible consequences.
Each combination of successes or failures of barriers leads to a specific consequence or event.
The method can also be used quantitatively to calculate the probability of each outcome or
consequence giving the failure probability of each barrier.
SELECTION OF PROJECT AND RISK ANALYSIS IN PRACTICE

Steps in risk analysis process

The risk analysis process usually follows these basic steps:
1. Conduct a risk assessment survey: This first step, getting input from management and
department heads, is critical to the risk assessment process. The risk assessment survey is a
way to begin documenting specific risks or threats within each department.
2. Identify the risks: The reason for performing risk assessment is to evaluate an IT system or
other aspect of the organization and then ask: What are the risks to the software, hardware,
data and IT employees? What are the possible adverse events that could occur, such as
human error, fire, flooding or earthquakes? What is the potential that the integrity of the
system will be compromised or that it won't be available?
3. Analyze the risks: Once the risks are identified, the risk analysis process should determine
the likelihood that each risk will occur, as well as the consequences linked to each risk and
how they might affect the objectives of a project.
4. Develop a risk management plan: Based on an analysis of which assets are valuable and
which threats will probably affect those assets negatively, the risk analysis should produce
control recommendations that can be used to mitigate, transfer, accept or avoid the risk.
5. Implement the risk management plan: The ultimate goal of risk assessment is to
implement measures to remove or reduce the risks. Starting with the highest-priority risk,
resolve or at least mitigate each risk so it's no longer a threat.
6. Monitor the risks: The ongoing process of identifying, treating and managing risks should
be an important part of any risk analysis process.