11/18/2022

Course on Project Management I

By Dr. Aloke Kumar Dutta
Lecture : 2
Topic :
Project Management

Main Topics to be discussed are :

Project Feasibility Studies – Pre-Feasibility and Feasibility Studies,
Preparation of Detailed Project Report, Technical Appraisal,
Economic/Commercial/Financial Appraisal including
Capital Budgeting Process, Social Cost Benefit Analysis [2L]

Project Feasibility Studies I

Pre-Feasibility Study
A pre-feasibility study is the most crucial aspect of any project. It is basically the art of measuring
the viability of the project with respect to the real world challenges and the benefit that it would
bring to the organization. The results of the pre-feasibility study are probably the first hand
project information which is taken into consideration by the decision makers and investors. Most
importantly, it acts as a basis if an organization wants to carry out a major expansion program
following a successful preliminary program. Simply put, the aim of a feasibility study is to evaluate
and then remove all uncertainties that may tend to arise in the project. Experts believe that pre-
feasibility study provides a basis for an in-depth design and construction. Additionally, it throws
light into the fact that whether it can be completed in a technically sound and
economically viable way.

The pre-feasibility study is often considered as an integral part of the project development process. It is
even one of the determining factors of the feasibility study, which is more costly and resource intensive
than pre-feasibility study. The pre-feasibility study helps in determining whether it should be undertaken
or not.

However, it is to be noted that pre-feasibility depends a lot on the project itself, i.e. the generation,
technology, etc. In some cases, several alternative technologies are also used for reaching a preliminary
optimal solution. Though the pre-feasibility study does not provide a direct answer to how secured
a project is and what would be the profit to earnings ratio, it may, however, highlight the most likely
pursue greater profitability and areas that need further attention before securing the first round of
funding.

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Project Feasibility Studies II

Feasibility Study
A feasibility study is particularly an analysis that takes into consideration all the relevant factors
of a project — including economic, technical, legal, and scheduling considerations. The goal is to
ascertain the likelihood of completing the project successfully, within the stipulated timeline.
Project managers often use feasibility study to weigh the pros and cons of taking up the project before
investing the company’s time and resources. According to experts, a feasibility study provides a lot of
crucial information to the company’s management and prevents it from blindly venturing into risky
businesses.

Experts believe a detailed feasibility study comprises an in-depth analysis of the historical
background of the business or project, including but not limited to the descriptions of the products or
service, accounting statements, details of the operation and management, market share and policies,
financial data, legal requirements, tax obligations, etc. You can check out a feasibility study example
online to get a clear idea.

Decoding Feasibility Studies

Well, let’s understand what feasibility study is. But first, it is important to the build a concept on the term
‘feasibility study’. A feasibility study is simply a detailed analysis of the practicality of a proposed
plan or project. As the name suggests, these studies primarily ask whether the project is practical and
feasible to achieve. This is done by delving into the aspects of the project, concept, and the route
map. Some other factors like expenditure, technology and tools necessary to complete the
project, and expected ROI are also taken into account.

Project Feasibility Studies III

There are five most important areas of Feasibility Study. They are as follows :
Technical Feasibility — This study entirely focuses on the technical resources that are available to the organization.
It helps businesses determine whether the technical resources meet the capacity and whether the team is skilled enough to
convert the ideas into actually working systems. Experts speak; whenever relevant risks are identified by means of a
detailed technical feasibility study, the best resources must be allocated as soon as possible in order to ascertain the risks
posed by such risks. Simply put, the aim of technical feasibility study is to define a technically feasible PPP project.
Economic Feasibility — This assessment typically includes a cost/ benefit analysis of the project. The goal of this
study is to help organizations determine the viability and the probable cost and benefits associated with the project before
the allocation of the final resources. To top it all, it serves as an independent project assessment and enhances the
credibility of the project.

Legal Feasibility — This assessment thoroughly analyzes whether any aspect of the project is conflicting with the legal
requirements like zoning laws, data protection acts, social media laws, etc. Let’s say if an organization wants to open
up its new branch in a specific location — a feasibility study will help the organization to understand the legal complexities
associated with that location and the ways to overcome the same. If there is any legal dispute associated with that area, a
thorough feasibility study would provide them with all the details. In this way, it can help them save a lot of their time and
money.

Operational Feasibility — This assessment involves conducting a study for the purpose of analyzing and determining
whether the needs of the organization can be met after the completion of the project. Added to that, it also analyzes how
the project plan will cater to the requirements as stated in the requirements analysis phase of the system development.

Scheduling Feasibility — This assessment involves undertaking a study in order to analyze and determine whether
the project will be completed within time. In scheduling feasibility, the organization calculates how much time
the project will take to complete.

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Project Feasibility Studies IV

Importance of Feasibility Study
Feasibility studies are one of the most vital aspects of business development. It helps businesses to
channelize their resources in a streamlined manner, identify obstacles that may disrupt their regular day
to day operations, and forming new marketing strategies that would help in brand building. Most
importantly, it provides a deep insight into the amount of funding it will need to keep the business up
and running.
Benefits of Conducting a Feasibility Study
We have already discussed feasibility study meaning. Needless to mention; the importance of feasibility
study for any organization is paramount for the success of a project. A feasibility study always uncovers
new ideas that completely change the scope of the project and unravel new opportunities. Experts have
revealed that conducting a feasibility study is beneficial to the project as it gives the organization and its
stakeholders a clear picture of the proposed project.
Some of the key benefits of a feasibility study are listed below :
 Improves the focus of the team members.
 Identifies new opportunities.
 Provides key information about the project.
 Narrows down the business alternatives.
 Identifies the valid reasons for undertaking the project.
 Enhance the success rate of the project by evaluating multiple parameters.
 Aids in decision making.
 Identifies reasons for not continuing with the project.

Project Feasibility Studies V

Detailed Project Report (DPR)
As the name suggests, a project report is a detailed plan of action and particulars about a project. The
primary goal of preparing this report is to prepare a strategy that is needed to be undertaken for
the completion of the project in a proper manner. The strategy may comprise various aspects of a
project, such as technical feasibility, financial aspects, marketing goals, etc.
The DPR comprises a detailed project report and all the other necessary aspects that are required to be
submitted to the financial institutions for raising funds. Added to that, it consists of the analytical study
of the proposed project and its viability in the real world. It also highlights the real world challenges that
may tend to hamper the project. The capacity of the promoters and competence of the project is
also mentioned in the report.

The format/ structure of the Detailed Project Report (DPR) is as follows:

 Title page, Name , Affiliation, Date etc.

 Acknowledgement
 Content List
 Abbreviation
 Executive Summary
 Introduction Background ( including Geographical and Historical details)
 Main Technical Analysis
 Main Financial Analysis
 Recommended Action Plan
 Appendices

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Project Feasibility Studies VI

Importance of DPR
DPR carries immense significance in any project and may be named as building block for any project. Thus in DPR
sufficient details must be included in order to ensure appraisal, approval, and proper implementation of the project.
The major sectors that are covered in DPR are as follows –
Sector Background Context & Broad Project Rationale — It provides information on the existing status of the physical
infrastructure, baseline information in terms of physical infrastructure, and list of various other projects that requires
capital and are essential for the successful completion of the project.

Project Definition, Concept and Scope — This comprises the design, detailed engineering, and drawings as applicable
in the project. These also serve as a reference for packaging of contracts either individually, or through combinations.

Project Cost — This provides detailed knowledge of the cost of the project. This includes but not limited to the cost of
land acquisition, physical infrastructure (component-wise cost), environmental compliance cost, rehabilitation and
resettlement cost, cost of survey and investigation, etc.

Project Institution Framework — This focuses on how construction work (if any) would proceed. It highlights whether
any interference from a government organization is required and what are the formalities that are required to be followed.

Project Financial Structuring — Project financial structuring involves a combination of equity, grant, debt and finance
from private participation. It also examines the source of finance and analyzes the amount that each phase of the project
will require. Additionally, it throws light into the relationship between the different phases of the project and the
expenditure required.

Project Phasing — Project phasing is particularly important for high-value projects. This involves breaking down a
project in detail mentioning the activity/ tasks that are required to be completed within a stipulated time limit. Added to
that, it highlights the relationship between each part of the project and the expected time to complete them.

Project Feasibility Studies VII

Importance of DPR -- Contd.

Project O&M Framework and Planning — Here, the key performance metrics in regard to billing & collections are
selected (for the recent financial year, and if possible, the current quarter of the ongoing financial year). Additionally, the
billing ratio (in terms of physical and financial units separately), cost of billing & collection (in absolute terms; as a per cent
of total cost) are also taken into account.

Project Financial Viability — The Project financial assessment explicitly states the cost of capital considered and
calculation method implemented to deduce the same. This includes details of all the transactions carried out in the last 5
years and projections for the upcoming 20 years. The assumptions made in projections must also be included.

Project Benefits Assessments — A list of benefits from both social and economic aspects in qualitative terms that can be
reaped out from the project are first taken into account. Furthermore, the quantification of these benefits along with
underlying assumptions is considered. Going forward, the impact on citizens/user segments are noted down.

Benefits of Detailed Project Reports

Here are 7 key benefits of DPR and why they are must for the successful completion of any project :

Tracking
The most basic advantage of DPR is ‘tracking’. DPR helps managers, team members, and stakeholders to keep track of
the proceedings of the project and the method implemented. Some items that are necessary to keep a track include
tasks, issues, risks, budget, and the overall condition of the project.
Identifies Risks
Identifying risks is a key step to turn any project into a success. With the right reports, it is very easy to spot a risk early
and take necessary action or ask project stakeholder for help. Reporting the risks also makes it easy for the team to
work on the problem.

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Project Feasibility Studies VIII

Benefits of Detailed Project Reports – Contd.
Cost Management
Cost management is not an easy task. But with regular reporting, it’s not that difficult to narrow down the expenditure
clearly and manage the budget with complete visibility.
Visibility
Visibility is one of the most important aspects of project management. It is also the most asked about question. Reporting
increases visibility into the projects and provides full insight into how the project is performing, be it positive or negative.
Control
Needless to mention; reporting puts managers in complete control of the project. It allows them to see and analyze the
progress, stagnation, regress of certain elements, how team members are performing, and the quality of work completed
within a specified time.
Learning
Information provided by the team drafting the DPR helps decision makers decide further course of action. For instance,
they may figure out that communication was an issue and make necessary changes to the plan for the next phase of the
project.
Drives project success
If there’s any part of a project that requires reporting, people will definitely report on it. But if there’s an element that
doesn’t require reporting, people will obviously won’t. The knock-on effect? The part of the project which was not reported
falls by the wayside. However, if an in-depth reporting is done, the team members would get daily feedback, and no part of
your project will be left out.
By now, the importance pre-feasibility study, feasibility study and detailed project reports (DPRs) for the successful
completion of a project must have understood. It is so critical and vital for a project that Visakhapatnam Steel Project
has undergone three DPRs during 1983 –1985 like DPR, then Revised DPR, and finally Comprehensive Report
on DPR ( with Rationalized Concept ) prepared by the consultant M/S M N Dastur & Co. before getting green
signal from the Government of India to proceed.

Project Feasibility Studies VIII

Benefits of Detailed Project Reports – Contd.
Cost Management
Cost management is not an easy task. But with regular reporting, it’s not that difficult to narrow down the expenditure
clearly and manage the budget with complete visibility.
Visibility
Visibility is one of the most important aspects of project management. It is also the most asked about question. Reporting
increases visibility into the projects and provides full insight into how the project is performing, be it positive or negative.
Control
Needless to mention; reporting puts managers in complete control of the project. It allows them to see and analyze the
progress, stagnation, regress of certain elements, how team members are performing, and the quality of work completed
within a specified time.
Learning
Information provided by the team drafting the DPR helps decision makers decide further course of action. For instance,
they may figure out that communication was an issue and make necessary changes to the plan for the next phase of the
project.
Drives project success
If there’s any part of a project that requires reporting, people will definitely report on it. But if there’s an element that
doesn’t require reporting, people will obviously won’t. The knock-on effect? The part of the project which was not reported
falls by the wayside. However, if an in-depth reporting is done, the team members would get daily feedback, and no part of
your project will be left out.
By now, the importance pre-feasibility study, feasibility study and detailed project reports (DPRs) for the successful
completion of a project must have understood. It is so critical and vital for a project that Visakhapatnam Steel Project
has undergone three DPRs during 1983 –1985 like DPR, then Revised DPR, and finally Comprehensive Report
on DPR ( with Rationalized Concept ) prepared by the consultant M/S M N Dastur & Co. before getting green
signal from the Government of India to proceed.

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Project Feasibility Studies IX

Technical Feasibility Study / Technical Appraisal

Technical feasibility – lays out details on how a good or service will be delivered, which includes transportation,
Business location, technology needed, materials and labor.
The order that you present technical information is not as important as making sure you have all the components to show
how you can run your business.

You do not have to include specific financial information in the technical portion of your feasibility study, but all
information in this component must support your financial data represented elsewhere. Basic things that most
Businesses need to include in their technical feasibility study include:
 Materials
 Labor
 Transportation or Shipping
 Physical Location
 Technology

Calculating Material Requirements

In this section, you list the materials you need to produce a product or service, and where you will get those materials.
Things to include in your list of materials:
Parts needed to produce a product,
Supplies (glue, nails, etc.), and
Other materials that are involved in producing or manufacturing your product.
Calculating Labor Requirements
In most cases, labor will be one of your biggest small business expenses. In this section, you will list the number and types
of employees needed to run your business now, and that may be employed in the future as your business grows.
You can break labor into categories if necessary:
Senior Level Management
Office and Clerical Support
Production or Distribution

Project Feasibility Studies X

Technical Feasibility Study / Technical Appraisal – Contd.

Calculating Labor Requirements

In most cases, labor will be one of your biggest small business expenses. In this section, you will list the number and types
of employees needed to run your business now, and that may be employed in the future as your business grows.

You can break labor into categories if necessary:

 Senior Level Management
 Office and Clerical Support
 Production or Distribution
 Professional Staff (i.e., lawyers, accountants, engineers, marketing)
 Fulfillment (i.e., mail room, shipping department)

Transportation and Shipping Requirements

In the Transportation Feasibility component, list things that will affect how you get your goods or services to other
businesses or individuals, including the methods of transportation and shipping services that will be needed to get your
product or services from the suppliers as well as to a customer. They may include :
 Special handling or other unique arrangements required to transport your product;
 Any special permits that will be required, including postal rate discounts; and
 Cars (company- or privately-owned) and other vehicles needed to conduct your business.

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Project Feasibility Studies XI

Technical Feasibility Study / Technical Appraisal – Contd.
Physical Location of Your Business
Where you run your business will have an effect on your success. You might need any of the following:

 A “Brick and Mortar” Office ( Office spaces outside your home)

 Warehouse Facilities
 Your Own Factory
 Your Own Trucking Facility
 Any other purchased or rented facilities needed to conduct your business.
In the Physical Location Feasibility component, you should also discuss the pros and cons of where these facilities will be
located including its latitude, longitude, altitude, humidity etc.

Technology Requirements to Run Your Business

Every business needs at least some kind of technology to operate. The Technology component includes a list of the
following:
 Manufacturing Machines / Equipments along with it’s production and operational technologies
 Computer Systems (Hardware , Software along with networking)
 Telecommunications
 Inventory Management and Maintenance Management System
 Teleconferencing Facilities and Equipment
 Alarm or Camera ( CCTV) Systems
 Cash Registers, Credit Card Collection, Check Processing
 Special Devices to Accommodate the Disabled
 Cell Phones, PDA’s, or Other Devices Needed to Conduct Business
Thus we may conclude that technical appraisal (feasibility study) is an inevitable preclude to start a project.

Project Feasibility Studies XII

Economic/Commercial/Financial Appraisal
Economic appraisal
Economic Appraisal should always include an assessment of value for money (VFM). This is the perspective
of economic appraisal and therefore its scope is very wide. In fact it seeks to identify all the costs and
benefits from a project, policy or programme.
The main types of economic appraisal are:
 Cost–benefit analysis
 Cost-effectiveness analysis
 Scoring and weighting
It facilitates good project management and project evaluation. Economic Appraisal is an essential part of
good financial management, and is vital to decision-making and accountability.

Commercial appraisal
Commercial appraisal shares some of the characteristics of economic appraisal but is much narrower in
scope. Its purpose is to establish whether a proposed activity will be viable in a commercial sense. A
proposal may be considered commercially viable if, over its useful life, it is expected to earn sufficient
revenue to cover its costs and yield an acceptable financial rate of return.

The distinction between economic and commercial appraisal is well illustrated by their use in projects involving assistance
to industry, such as inward investment projects and industrial expansions. In these cases economic appraisal is used to
assess the economic efficiency of the project, that is, its VFM from a broad economic perspective; and commercial appraisal
is used to help assess project viability which focuses on the proposal's financial soundness as a business proposition from
the narrower perspective of the assisted company. These cases demonstrate how economic and commercial appraisals
should complement each other in the process of assessing the overall soundness of a project. However, a commercial
appraisal should not generally be used as a substitute for an economic appraisal.

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Project Feasibility Studies XII

Economic/Commercial/Financial Appraisal
Economic Appraisal
Economic Appraisal should always include an assessment of value for money (VFM). This is the perspective
of economic appraisal and therefore its scope is very wide. In fact it seeks to identify all the costs and
benefits from a project, policy or programme.
The main types of economic appraisal are:
 Cost–benefit analysis
 Cost-effectiveness analysis
 Scoring and weighting
It facilitates good project management and project evaluation. Economic Appraisal is an essential part of
good financial management, and is vital to decision-making and accountability.

Commercial Appraisal
Commercial appraisal shares some of the characteristics of economic appraisal but is much narrower in
scope. Its purpose is to establish whether a proposed activity will be viable in a commercial sense. A
proposal may be considered commercially viable if, over its useful life, it is expected to earn sufficient
revenue to cover its costs and yield an acceptable financial rate of return.

The distinction between economic and commercial appraisal is well illustrated by their use in projects involving assistance
to industry, such as inward investment projects and industrial expansions. In these cases economic appraisal is used to
assess the economic efficiency of the project, that is, its VFM from a broad economic perspective; and commercial appraisal
is used to help assess project viability which focuses on the proposal's financial soundness as a business proposition from
the narrower perspective of the assisted company. These cases demonstrate how economic and commercial appraisals
should complement each other in the process of assessing the overall soundness of a project. However, a commercial
appraisal should not generally be used as a substitute for an economic appraisal.

Project Feasibility Studies XII

Economic/Commercial/Financial Appraisal
Financial Appraisal
A financial appraisal of a project proposal considers the potential rewards of carrying out the project against the
predicted costs. The evaluation will depend on; the size of the project and the time-span over which the costs and
benefits are going to be spread. The justification is that the return will at least exceed the amount spent. This
return/payback is analyzed in a number of ways in order to determine the net benefit:
 Payback Period Analysis – simply considers the cash flow of costs and benefits
 Discounted Cash Flow – considers the ‘time value’ of cash flows
 Internal Rate of Return – sets basic return criteria on the time value of money

Payback analysis the most basic financial evaluation method, in which the income that will be generated with the initial
investment. For example, an initial investment of $40 million will be paid back in 8 years if the revenue generated is $5
million per year. However, the analysis only include the costs within the payback period, and ignores the total life-cycle
costs of a product.
Considering the ‘time value’ of the cash flow is done through a technique known as discounting. It is a comparison
Between the value of the return on an investment and the value of the same sum of money, had it been deposited in a bank
account at a given rate of interest for the same period of time instead. Hence, the opportunity cost of the project is
considered using this technique

Another technique is to calculate the internal rate of return of the project – i.e. the discount rate for which the net
present value (NPV) is 0. The NPV is the difference between the present value of benefits – the present value of
costs. Finding this discount rate can be done mathematically involving many iterations until the desired NPV of 0 is
gained. Thus, using IRR helps remove the need to choose a discount rate for a project, which can save considerable debate.
However, the IRR technique cannot cope with changes in the discount rate over time, which is very problematic when rates
change rapidly and by high percentages, e.g. during a financial crisis (as the one in 2008). Also, two project proposals may
have the same IRR but result in very different NPV’s – then, the proposal yielding the highest NPV is the most preferable.