Project

Management
(MGMT 3192)

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 Chapter one
General introduction about
project
 1.1. Meaning and Definition of
Project
What is project?
• Project is in general a building block of an
investment plan.
• A project can be described as a combination
of human and material resources pooled
together in an organization to achieve a
specific objective.

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 Definition of Project (Cont...)

According to USA Project Management

Institute,
“Project is a one shot, time limited, goal
directed, major undertaking, requiring the
commitment of varied skills and resources”
• It also describes a project as “a combination
of human and non-human resources pooled
together in a temporary organization to
achieve a specific purpose.”

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 Def. of Project (Cont…)

ISO-8402. ( ISO document defines project as)

“A unique process consisting of a set of

coordinated and controlled activities with
start and finish dates, undertaken to
achieve an objective conforming to specific
requirement including constraints of time,
cost and resources”

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 Def. Project (Cont…)

From the above all definitions we can learn that

• A project is an economic/development activity
• It requires commitment of scarce resources
• It brings some benefit from its accomplishment
• The benefit should exceed its cost
• Implementation of a project needs resources or
inputs.
• Every project converts the given inputs into outputs
through the process of implementation
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 1.2. Characteristics of Project
The special features of project that differentiate it
from any other on-going activities, are

• Objective: A project has a fixed set of objectives.

Once the objectives are achieved the project ceases
to exist.
• Life span: A project can not continue endlessly. It
has to come to an end at some time.
• Single entity: A project is a single entity and is
normally entrusted to one responsibility centre, while
participants in the project are many.
• Life cycle: A project has a life cycle reflected by
growth, maturity and decay.

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 Characteristics of Project (cont…)

• Uniqueness: No two projects are exactly

similar even if the plants are exactly identical
or are duplicated.
• the location,
• the infrastructure,
• the agencies and
• the people make each project unique.
• Team work: Any project calls for team work-.
The team members may be from different
–discipline,
–organization, and even country
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 Characteristics of Project (cont…)

• Change: A project sees many changes through

out its life. While some of these changes may
not have any major impact, there can be
changes which will change the entire course of
the project.
• Risk and Uncertainty: Every project has a
risk associated with it.
The degree of risk and uncertainty will depend
on how a project has passed through the
various stages of its life cycle.

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 Characteristics of Project (cont…)

• Unity in diversity: A project is complex set of

varieties. Varieties in terms of
–Technology
–Equipment and material
–People and machinery
–Work culture and ethics
But they remain interrelated.
High level of sub contracting : A high
percentage of a work in a project is done
through contractors. The more complex is a
project, the more will be the extent of
contracting.

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 1.3. Project Vs Plan/Program

• Some people use the term „project‟ and

„program‟ interchangeably.
• In many cases the term project is used for
what should be termed as program or work
package.
• However, there is a quite difference between
the two.
• A project normally originates from a plan
which can be a national plan or corporate plan.
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 Program
Program in general is a group of related projects
that are managed in a coordinated way to
achieve certain objective.
A program is thus,
• larger in scope,
• not necessarily time bounded and
• its objectives are broader

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 Program (Cont …)
Example,
• The national goal/plan: Poverty Eradication
• Strategy: Increase productivity ( in all sectors)
• Development program: Increase agricultural
productivity

This may result in a number of projects like,

• Construction of dams ( irrigation infrastructure)
• Upgrading the skill of agricultural practices
• Construction of training centers

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 Program (Cont …)

Health program may have a number of

projects like,

• Construction of hospitals

• Training of health officers

• Expansion of health centres.

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 1.4. Project Parameters

During a project's life, management

focuses on three basic parameters:
quality, cost, and time.
• Traditionally, it is said that a
successfully managed project is the one
that is completed at the specified level
of quality, on or before the deadline,
and within the budget.

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 Project Parameters (cont…)

.
Project parameters

Quality Cost Time

Performance Budget Schedule

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 Project Management

Q. What is project management?

Project Management is a set of principles,
practices, and techniques applied to lead project
teams and control project schedule, cost, and
performance risks to result in delighted customers.

Cost, time and performance are the focus.

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 Cont…

• Project management includes planning,

organizing, directing, and controlling project
activities in addition to motivating what is
usually the most expensive resource on the
project - the people.

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 cont.…

• Project Management is therefore:-

• the art of directing and coordinating
human and material resources
throughout the life of a project by using
modern management techniques to
achieve predetermined objectives of
scope, cost, time, quality and participant
satisfaction’.
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 Project management…Cont’d
 Every person, every organization and every nation is concerned
with project management.
– An individual builds a house. It is a project to him.
– An organization sets up new factory. It is a project for the
organization.
– The government of a country builds high ways, dams, thermal
power plants, hydropower plants, airports, etc. These are all
projects that a country undertakes.

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 Typical Project Problems
1. Scope may not be clearly defined when
commitment is made to a client.
2. There may not be enough resources allocated
(people, money, materials, time, space, etc).
3. Conflict of interest between or among stakeholders
(ops vs. engineers, sales vs. technical support, line
vs. staff).
4. Commitment to unrealistic dates – the PM may be
too optimistic about the completion date of the
project.
5. There may be unclear roles and responsibilities.
6. Things may go wrong for some natural reasons.
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 Functions of the Project Managers
 Project managers perform the following major
functions/roles:
1. Plan work (scope, budget, schedule),
2. Obtain and manage resources,
3. Resolve conflicts and problems,
4. Motivate people
5. Communicate to the team, to the organization, and to the clients,
6. Set priorities,
7. Make decisions,
8. Control technical quality, budget, and schedule
9. Integrate multiple skills

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 Chapter two

PROJECT CYCLE

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 Meaning and definition of project life cycle
Before any project is actually realized it goes through
various planning phases
The different stages through which project planning
proceeds from inception to implementation are often
called “the project cycle”.
It is the project’s life cycle through which it advances
from infancy to maturity.
A project cycle is a sequence of events, which a project
follows.

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 2.2 Project life cycle models

 Dividing project life cycle into phases helps in better

management and control of a project.
 Like the definitions of a project, there are different project life
cycle models which differ in their perspective, emphasis and
level of detail.
 However, here we give more emphasis on the basic models. The
Baum’s cycle and other models such as UNIDO project cycle.

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 2.2.1. The Baum Cycle (World Bank
Procedures)
 The first basic model of a project cycle is that of Baum (1970),
which has been adopted by the world bank and initially
recognized four main stages, and at a later stage (in 1978) the
author has added an additional stage namely:
1. Identification
2. Preparation
3. Appraisal and selection
4. Implementation
5. “Evaluation”

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 .
Stage 1, Identification
• The first stage in the cycle is to find potential
projects.
• Project identification amounts to finding project
idea which contribute towards achieving specified
business or development objectives.
• The activity in this stage is coming up with project
ideas

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Stage 2, Preparation (pre – feasibility or feasibility studies)
• Once projects have been identified, there begins a process of
progressively more detailed preparation and analysis of project
plans.

• At this stage the project is being seriously considered as a

definite investment action.

• Project preparation (project formulation) covers the

establishment of technical, economic and financial feasibility.

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 .
• Decisions have to be made on the scope of the project, location
and site, soil and hydrological requirements, project size (farm or
factory size) etc.
• Resource base investigations are undertaken and alternative
forms of projects are explored.
• Complete technical specifications of distinct proposals
accompanied by full details of financial and economic costs and
benefits are the outcome of the project preparation stage.

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 .
• Project design and formulation is an area in which local

and international consultants are very active especially

for big project that cover large areas and have big

budgets.

• The project now exists as a set of tangible proposals.

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 Stage 3: Appraisal
.
• After a project has been prepared, it is generally appropriate for a
critical review or an independent appraisal to be conducted.

• This provides an opportunity to re-examine every aspect of the

project plan to assess whether the proposal is appropriate and
sound before large sums are committed.

• projects are appraised both in the field and at the desk level

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•
.
Appraisals should cover at least seven aspects of a project:

a) Technical – here the appraisals concentrate in verifying whether

what is proposed will work in the way suggested or not.
b) Financial – the appraisals try to see if the requirements for money
needed by the project have been calculated properly, their sources
are all identified, and reasonable plans for their repayment are made
where necessary.
c) Commercial – the way the necessary inputs for the project are
conceived to be supplied is examined and the arrangements for the
disposal of the products are verified.

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d) Incentive – the appraisals see to it whether things are arranged
.
in such a way that all those whose participation is required will find
it in their interest to take part in the project.
e) Economic – the appraisal here tries to see the economic
significance of the project
f) Managerial – this aspect of the appraisal examines if the capacity
exists for operating the project and see if those responsible ones
can operate it satisfactorily.

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 .
g) Organizational – the appraisal examines the project if it is
organized internally and externally into units, contract policy
institution, etc so as to allow the proposals to be carried out
properly and to allow for change as the project develops.

 These issues are the subjects of specialized appraisal report.

And on the basis of this report, financial decisions are made –
whether to go ahead with the project or not.

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 .
Stage 4: Implementation

• The objective of any effort in project planning and

analysis clearly is to have a project that can be
implemented to the benefit of the society.

• Thus, implementation is perhaps the most important

part of the project cycle.

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 .
• In this stage,
– Funds are actually disbursed to get the projects started and
keep running,
– A major priority during this stage is to ensure that the project is
carried out in the way and within the period that was planned.
– It is during implementation that many of the real problems of
projects are first identified

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 .
Stage 5 Evaluation
• The final phase in the project cycle is evaluation.

• Once a project has been implemented, it is often useful, to look

back over what took place, to compare actual progress with the
plans, and to judge whether the decisions and actions taken
were responsible and useful.

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 .

• The extent to which the objectives of a project are

being realized provides the primary criterion for an
evaluation.
• The analyst looks systematically at the elements of
success and failure in the project experience to
learn how better to plan for the future.

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• Evaluation should be undertaken when a project
is terminated or is well into routine operation.
• Evaluation is not limited only to completed
projects.
• It is important managerial tool in ongoing
projects.
• And formalized evaluation may take place at
several times in the life of a project.

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 .
• Different people may do evaluation. For example
• Project management will be continuously
evaluating the project
• The sponsoring agency, perhaps the operating
ministry, the planning agency or an external
assistance agency – may undertake evaluation.
• In large and innovative projects, the project’s
administrative structure may provide a separate
evaluation unit

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 UNIDO – Project Cycle
• UNIDO has established a project cycle comprising three distinct
phases):
1. THE PRE INVESTMENT PHASE
2. INVESTMENT PHASE AND
3. OPERATIONAL PHASE.
• Each of these three phases is divided into stages, some of which
constitute important consultancy, engineering and industrial
activities.

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 .
1. The pre- investment phase comprises:

 The pre-investment phase comprises several stages:

i. Project Identification
A. Opportunity studies:
B. Preliminary Screening
C. Pre-feasibility Studies
ii. Project preparation (feasibility studies)
iii. Project appraisal and investment decisions (appraisal
report).

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a) Opportunity studies:
• The identification of investment opportunities is
the starting – point in a series of investment –
related activities.

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Sources of Project Idea

1. At the macro level project ideas come from

• National, sectorial, or regional plans and strategies

• Unusual events such as drought, flood, earthquake etc

• Multi or bilateral agreement of countries

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2. At micro level project idea emanates from:
• The identification of unsatisfied demand or need of the
society
• The existence of unused or underutilized natural or human
resources
• The initiative of private or public enterprise in response to
the incentives provided by the government

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b) Preliminary Screening: Once some project ideas have been put
forward, the first step is to select one or more of them as potentially
viable.

• This calls for a quick preliminary screening by experienced

professionals who could also modify some of the proposals.

• At this stage the screening criteria are vague and rough,

becoming specific and refined as project planning advances.

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• During preliminary selection the analyst should
eliminate project proposals that are
– Technically unsound and risky;
– Have no market for the output;
– Have inadequate supply of inputs;
– Very costly in relation to benefits;
– overambitious sales and profitability;

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• It Depends on the experience and impartiality of
the professionals applying them.
• It is, however, necessary to conduct this
screening, even with indistinct criteria, in order
to reduce to a manageable number the project
alternatives to which more work and time will
be devoted.

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c) Pre-feasibility Studies: Following the preliminary
screening, promising project options should be
investigated in a systematic manner.
• This requires the preparation of brief reports
that indicate in sufficient detail the project
versions that are still promising and suggest
which ones should be eliminated

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• A pre – feasibility study should be viewed as an
intermediate stage between a project opportunity
study and a detailed feasibility study

• The difference being in the degree of detail of the

information obtained and the intensity with which
project alternative are discussed.

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• Content of the Pre-feasibility Study: To enable the relevant
authorities to decide on the merits of various project options, the
pre-feasibility study should, although briefly, discuss:
i. The structure and objectives of the project;
ii. The nature and size of the demand for the output or the needs
that would satisfy, together with the foreseen beneficiary
groups;
iii. The availability of the most important materials and human
inputs;
iv. Basic alternative technologies available and their merits and
weaknesses;
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v. Approximate investment and operation costs as well as
expected revenues and other benefits;

vi. Rough estimates of financial and economic returns;

vii. Any major factor that is likely to have an important effect on

the project

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ii. Project Preparation – Feasibility Studies
• If the pre-feasibility study indicates that the project is promising
and further work is justified, the project enters the stage of
preparation or feasibility study
• A feasibility study should provide all data necessary for an
investment decision.

• The commercial, technical, financial, economic and environment

prerequisites for an investment project should therefore be
defined and critically reviewed
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• The analysis of the project’s marketing, technical, financial,
economic and institutional aspects should be comprehensive
enough to allow the policy makers to decide on the future of
the project with confidence.
• Project preparation takes the form of a feasibility study
conducted by the agency sponsoring the project or by
consultants.

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iii. Appraisal and Investment Decision

• The project proposal in the form of a feasibility study is submitted

to the investment decision makers for a broad and impartial
appraisal.
• Appraisal is the comprehensive and systematic assessment of all
aspects of the proposed project.
• After appraising the project carefully, appraisers will decide
whether it will be implemented or not, with or without minor
modifications.

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2. THE INVESTMENT PHASE
• The next stage in the project is the actual implementation
of the project, followed by operation
• While in earlier stages of project planning there was more
thinking and less action, in this stage the combination
switches in favour of the latter: more action and less
thinking is needed.

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The phase is divided into the following stages:

1) Establishing the legal, financial and organizational basis for the

implementation of the project.

2) Technology acquisition and transfer,

3) Detailed engineering design and contracting, including tendering,

evaluation of bids and negotiations.

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• Detailed engineering design will include site preparation final
selection of technology construction planning and time
scheduling, Negotiations are concerned with legal obligations
arising from the acquisition of technology, construction of
buildings, purchase and installation of machinery

4) Acquisition of land for construction work and installation.

5) Pre-production marketing,

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6) Recruitment and training of personnel.
7) Plant commissioning and start-up. It is usually a brief but technically
critical span in project implementation.
 It links the preceding construction phase with the operational
(production) phase.
 This stage covers the signing of contracts between the investor on
the one hand, and the financing institutions, consultants,
architects and supplies of raw materials and required inputs on
the other.
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3) OPERATIONAL PHASE
• This is the production phase that commences after commissioning
and start-up of production, replacement and rehabilitation, and
expansion and innovation.
• The resultant challenges of this phase are viewed from the short-
term perspective and long-term perspective.
• In the shot-term challenges may arise with regard to application
of production techniques, operation of equipment, inadequate
labour productivity due to a lack of qualified staff and labour etc.
• The long-term view relate to the chosen strategies and the
associated production and marketing costs as well as sales
revenues.
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 CHAPTER THREE

PROJECT IDENTIFICATION AND

SCREENING
 – Project Idea- Meaning

• Project idea identification is the first step towards establishing a

successful venture.

• This stage is about finding potential projects that will result in

positive net present value or that provide benefits for the society.

• Projects usually start as new ideas which are carefully examined

and if found feasible and desirable are translated in to projects.
Such initiation of project ideas is called project conception.
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• Project conception is forming or developing ideas regarding a
required intervention in a specific area to address a problem or
take advantage of opportunities.

• Project identification is concerned with collection, compilation and

analysis of economic data for the purpose of locating possible
opportunities for investment and with development of such
opportunities.

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 • Sources of Project Ideas:

• The sources of project ideas are mainly classified into

two types. The classifications are as follows.

1. Macro Source of Project Idea

2. Micro Sources of Project Idea

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1. At the macro level project ideas come from
• National, sectorial, or regional plans and
strategies
• Unusual events such as drought, flood,
earthquake etc
• Multi or bilateral agreement of countries

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2. At micro level project idea emanates from:
• The identification of unsatisfied demand or
need of the society
• The existence of unused or underutilized
natural or human resources
• The initiative of private or public enterprise in
response to the incentives provided by the
government

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 3.4. Opportunity Studies and Preliminary Screening

• By using the above two sources of project idea, a long

list of project ideas can be developed.

• However, those projects that are not promising should be

eliminated through a preliminary screening process.

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• This preliminary screening weighs a project in terms of the following
variables:
A. Compatibility with the Promoter: The idea should be compatible with
the interest, personality and resources of the entrepreneur.
 A real opportunity should fit the personality of the promoter-abilities,
training and priorities; accessible and offers a prospect of rapid growth
and high return on invested capital.
B. Compatible with Governmental Priorities : The project idea should be
within the government’s regulatory framework. In addition, it should be in
line with the country’s goals to ensure its sustainability.

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C. Availability of Inputs: The resources and inputs required for the
project must be reasonably assured. These inputs include: capital
requirements of the project, technical know-how, raw materials,
power and foreign exchange.
D. Adequacy of Markets: The size of the market for the goods or
services produced by the project must offer adequate sales
volume. In this regard, both the current and predicted demand
levels should be assessed.

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• In general assessment of the market adequacy should consider:
a. Total present domestic market
b. Competitors and their market share
c. Export markets
d. Sales and distribution system
e. Projected increase in consumption
f. Barriers to entry
g. Economic, social and demographic trends
h. Patent protection

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E. Investment costs: - Costs of raw materials transportation costs, distribution
costs, labour costs, production costs and investment costs are usually
considered. If the above costs are very high sustainability of the project is
questionable.
• Demand and supply factors: - This involves the projection of both short term
and long term requirements of the project’s output and examining the
implications of these on the project’s capacity. Many projects fail because
they have started with a very large capacity only to operate at a much lower
capacity. On the other hand, increasing the capacity of the project shortly
after it starts operation is very costly.

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F. Social and environmental considerations: - the project
should also conform to the social considerations of the
locality in which it is implemented.

• In addition; especially in industrial projects, due

consideration should be given to the environmental
effects of it on the surrounding.

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G. Reasonableness of Costs: The cost of the proposed
project should be commendable considering the benefits
expected from it.
• The following costs are considered in this regard:
– Cost of material inputs and labour
– Factory overheads
– Administrative expenses
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H. Acceptability of Risk Level: The desirability of a project is critically
dependent on the risk characterizing it.

• The following factors are used in assessing the risk level of a project:

– Vulnerability of business cycle

– Technological changes

– Competition from substitutes and imports

– Government control over price and distributions

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3.5 Pre-feasibility Studies

• It is an intermediate stage between the project identification and

a detailed feasibility study The difference between the feasibility
study and the pre-feasibility study is in the extent of detail of the
information obtained.

• The structure of the pre-feasibility study should be the same as

the structure of the feasibility study.

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• In particular, the review should cover the various alternatives
identified in terms of:
– Project or corporate strategies and scope of the project
– Market and marketing concept
– Raw materials and factory supplies
– Location, site and environment
– Engineering and technology
– Organization and overhead costs
– Human resource
– Project implementation schedule and budgeting

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• In general, the pre-feasibility study involves subjective judgment of the
project in terms of:

A. Availability of an adequate market: - judgments relating to the

 Number of potential customers,

 Needs of the customers,

 Strength of the competitors,

 Availability and access to sales and distribution network and export

possibilities.

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B. Project growth potential: - assessment of
indicators on projected increase:
In the number of customers,
Increase in the rate of acceptance of the
products,
The general economic, social and political trend
which could affect the growth potential of the
project.

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C. Investment costs: - Costs of raw materials
transportation costs, distribution costs, labour costs,
production costs and investment costs are usually
considered.

• If the above costs are very high sustainability of the

project is questionable.

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D. Demand and supply factors:
E. Social and environmental considerations: - the
project should also conform to the social
considerations of the locality in which it is
implemented.
 In addition; especially in industrial projects, due
consideration should be given to the environmental
effects of it on the surrounding.

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 CHAPTER FOUR

PROJECT PREPARATION
(FEASIBILITY STUDIES)
 CHAPTER FOUR
4. Project Preparation

4.1. Market and Demand Analysis:

 The first step in project analysis is to estimate the

potential size of the market for the product (or service
to be offered) proposed to be manufactured and get an
idea about the market share that is likely to be
captured.

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 …Cont’d

 The key steps involved in market and demand analysis are

organized into seven sections as follows:
a. Situational analysis and specification of objectives
b. Collection of secondary information
c. Conducting market survey
d. Characterization of the market
e. Demand forecasting
f. Uncertainties in demand forecasting
g. Market planning.

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A. Situational Analysis and Specification of Objectives

• A situation analysis provides one with the current status of the key
aspects of the market and its participants.

• It include customers, competitors, and middlemen.

• It analyses the characteristics of this aspects such as customer’s

preferences and purchasing power, strategies and actions of
competitors, and practices of middlemen.

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• To illustrate suppose Sony Corporation developed technology to
produce superior plasma television set and the management
wants to know where and how to market the TVs. The objectives
of the market and demand analysis may be to answer the
following questions:
• Who are the buyers of the TVs?
• What is the current demand for the TVs?
• How is the demand distributed geographically and seasonally?
• What prices will the customers be willing to pay for the superior
TVs?

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B. Collection of Secondary Information
• Information may be obtained from secondary and /or primary
sources. Secondary information is information that has been
gathered in some other context and is already available.
General sources of Secondary information:
– National level Report prepared by the Government
– Economic Survey
– Annual Reports by the Ministry
– Publication of Advertising agencies
• Secondary information should be used with great caution. Its
reliability, accuracy, and relevance for the purpose on hand should
be determined before use.

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C. Conduct of Market Survey
• Secondary information, though useful often, does not provide a
comprehensive basis for market and demand analysis.
• It needs to be supplemented with primary information gathered
through a market survey, specific to the project being appraised.
• The survey could be a census; where the entire population is
covered or a sample survey; only a proportion of the population
is covered.
• Census studies are prohibitively costly and infeasible because
proper sampling can produce the same or even more accurate
results than census studies.
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• Information sought in a market survey may cover one or more of the
following areas:
– Total demand and rate of demand growth
– Demand in different segments of the market
– Income and price elasticity of demand
– Motives for buying
– Purchasing plans and intentions
– Satisfaction with existing product
– Unsatisfied needs
– Attitude towards various products
– Social economic characteristics of buyers
– Customer preferences etc
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• Steps in a sample survey:

1. Select the sampling method and sample size.

2. Develop the questionnaire
3. Recruit and train the field investigators
4. Obtain information as per questionnaire from the sample
respondents
5. Scrutinize the information gathered
6. Analyze and interpret the information.
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• The results of a market survey depend on the following:

– representativeness of the sample,

– precision and adequacy of the questions,
– comprehension of the questions by the respondents,
– honesty of the respondents in answering the questions,
– integrity of the investigators and appropriateness of
data analysis methods.

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 D. Characterization of Market
 Based on the information gathered from secondary sources
and through the market survey, the market for the
product/service may be described in terms of the following:-
 Effective demand in the past and present
 Methods of distribution and sales promotion
 Price
 Consumer
 Supply and competition

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E. Demand Forecasting

• After gathering information about the various aspects of the

market and demand from primary and secondary sources, attempt
may be made to estimate future demand.

• A wide range of forecasting method is available to the market

analyst. These methods can be grouped in two categories

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I) Qualitative Methods: This method essentially rely on the judgments
of experts
A) Jury of executive opinion method: under this method opinions are
sought from a group of managers on the expected future sales they are
then translated into sales estimates
B) Delphi method: opinions are sought from a group of experts who don’t
know the identity of each other, any divergent opinions are then mailed
back to back for further opinion until a consensus is obtained.

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II)Quantitative Method: This method essentially rely on Quantitative data
• Trend projection method:
• Time Series Projection Methods
• Exponential Smoothing Method:
• Moving Average Method:
• Casual methods
• Chain ratio method:
• Consumption level method:

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f. Uncertainties in Demand Forecasting: Demand forecasts are
subject to error and uncertainty which arise from three
principal sources:
 Data about past and present market
 Methods of forecasting
 Environmental change
g. Market Planning. Prepare a marketing plan for the new product.

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4.2 Material Inputs and Supplies Study

• Different materials and other inputs required for

operating the project should be identified and their
availability, supply and method of estimating
operating costs should be analyzed

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 In this part of the feasibility study the following can be included:-
i. Identification of the type of material inputs and supplies to be
used in the project.
 Raw material (processed and/or semi processed) are those
materials which can be agricultural products, mineral products,
livestock and forest products, marine products)
 Processed Industrial material and components (metal, semi
processed materials, components and sub components)
 Auxiliary materials and factory supplies (chemicals, additives,
packaging materials, paints, oil, greasing, cleaning material, etc)
 Utilities: a broad assessment of utilities (power, water, )
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 ii. All requirements of materials and supplies should be identified
and specified in the study considering all socio, economic,
commercial, financial, and technical factors.
iii. The source of materials availability, and price of inputs are to be
analyzed.
iv. location of the available resources, area of supply, access to
transport, transport costs and alternate usage of such materials
need to be collected.

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v. Costs of raw materials and supplies:-
 The costs of materials and other supplies have to be analyzed in
detail to determine project economies.
 Estimating annual operating costs for materials and supplies are
to be made explaining the price mechanisms and key factors
affecting prices.
 Cost estimates may be expressed either as the cost per unit
produced or in terms of a certain production level to conduct
sensitivity analysis.

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4.3. Location, Site and Environmental Impact Assessment
4.3.1. Location
 Location analysis has to identify locations suitable for the
industrial project under consideration.
 Location and site are often used synonymously but must be
distinguished. The choice of location should be made from a
fairly wide geographical area, within which several alternatives
sites can be considered.

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 Traditional approach to industrial location focused, on the
proximity of raw materials and market place, mainly with the
intention of minimizing transport costs.

 However, the modern view requires consideration of not only

commercial, technical and financial factors, but also of the
social and environmental impact a project might have.

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• Generally, the choice of location is influenced by
a variety of considerations: proximity to raw
materials and markets, availability of
infrastructure, labor situation, governmental
policies, and other factors.

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A) Proximity to Raw Materials and Markets
• Proximity to the sources of raw materials and nearness to the
market for the final products are an important considerations for
location.
• In light of a basic location model, optional location is one
where the total cost (raw material transportation cost plus
production cost plus distribution cost for the final product) is
minimized.

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• Practically, it means that:
– A resource – based project like a cement plant or a steel mill
should be located close to the source of the basic material (for
example, limestone in the case of a cement plant and iron ore in
the case of a steel plant;
– A project based on imported material may be located near a
port
– A project manufacturing a perishable product should be close to
the center of consumption.

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 .
• Availability of Infrastructure: In a feasibility study, availability
of power, transportation, water, and communications should be
carefully assessed before a location decision is made.
• Labor Situation: In project where there is labor–intensive, the
labor situation in a particular location becomes important. The
key considerations in evaluating the labor situation are:
• Availability of labor, skilled, semi – skilled and unskilled
• Existing labor rates
• Labor productivity
• Labor legislation

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 .
• Governmental Policies
• Policies and regulations of a government have a considerable
influence on location. In most of the cases of public sector
projects, location is directly decided by the government.
• In the case of private sector projects, location is influenced by
certain governmental restrictions and inducements. Most often
the government may forbid the setting up of industrial projects in
certain areas which suffer from urban congestion.

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 .
Other factors
 Climatic conditions (Information should be collected on
temperature, rainfall, flooding time) and Geophysical aspects
(soil, water levels, and a number of special site hazard such as
earthquakes and susceptibility to flooding)
 General Living Conditions: the general living conditions, such as
the cost of living , housing situation, safety, and facilities for
education, health care, transportation and recreation need to
be assessed carefully.

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 .
Site Selection

• Once the location is decided upon, a specific project site and, if

available, site alternative should be defined in the feasibility study.

• A project site selection may depend on particular site condition,

which should be identified and described in the feasibility study.
• Two or three alternative site must be considered and evaluated
with respect to:
– Cost of land
– Cost of site preparation and development
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Ecological impact of the project, environmental impact assessment
(EIA)
 The site environment impact analysis will cover the impact of the
project and the alternatives (in terms of size, technology etc) on
the surrounding area, including its population, flora and fauna.
 This analysis should be integrative and interdisciplinary, assessing
the overall impact which taking into account the synergetic
effects of inter-linked systems.

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• It is part of the project planning process and an integral part
of feasibility analysis.

• Environmental benefits or costs of a project are usually

externalities or side effects that affect the society in whole
or in part.

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Objectives of Environmental Impact Assessment

• The general objective of environmental impact assessment in,

project analysis is to ensure that development projects are
environmental sound.

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• The specific objectives of environmental impact assessment are as
follows:
– To promote a comprehensive, interdisciplinary investigation of
environmental consequences of the project
– To identify critical environmental problems requiring further
investigation
– To develop an understanding of the scope and magnitude of
incremental environmental impacts
– To identify measures for mitigation of adverse environmental
impacts and for possible enhancement of beneficial impacts.

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4.4 Production Program and Plant Capacity
4.4.1 Production program
• Production program is a plan consist of the whole range of
project activities and requirement, including production levels to
be achieved under the technical ecological, social and economic
constraints.
• The production program, range and volume of products to be
produced depend on the market requirements, proposed
marketing strategy and the availability of resources.
• A production program should define the levels of output to be
achieved during specified periods related to the sales forecast.
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• Full production level may not be possible during initial
production operation owing to various technological,
production and commercial difficulties in addition to
marketing bottlenecks.

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4.4.2 Plant capacity

• Plant capacity (also referred to as production capacity) refers

to the volume or number of units that can be manufactured
during a given period.

• Plant capacity may be defined in two ways: feasible normal

capacity and nominal maximum capacity.

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A. Feasible normal capacity refers to the capacity attainable under
normal working conditions. This may be established on the
basis of the installed capacity, technical conditions of the plant,
normal stoppages, and downtime for maintenance, holidays,
and shift patterns.
B. The nominal maximum capacity is the capacity which is
technically attainable and this often corresponds to the
installed capacity guaranteed by the supplier of the plant.

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• Plant capacity is influenced by the following factors:
– Technological requirement: For many industrial projects,
particularly in process type industries, there is a certain
minimum economic size determined by the technological factor.
For example, a cement plant should have a capacity of at least
300 tons per day in order to use to rotary kiln method:
otherwise; it has to employ the vertical shaft method which is
suitable for lower capacity.
– Input constraints : In developing countries, there may be
constraints on the availability of certain inputs. Power supply
and foreign exchange basic raw materials may be scarce;

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 – Market conditions: The anticipated market for the product/service has
an important bearing on the plant capacity. If the market for the
product is likely to be very strong, a plant of higher capacity is
preferable. If the market is likely to be uncertain, it might be
advantageous to start with a smaller capacity
• Resources of the firm: both managerial and financial available resource of
a firm define a limit on its capacity decision. Obviously, a firm cannot
choose a scale of operations beyond its financial resources and managerial
capability.
Investment cost
Government Policy

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4.5. Technology and Engineering Studies
4.5.1. Assessment of technology required
• The primary goals of technology assessment are to determine and
evaluate the impacts of different technologies on the society and national
economy (cost-benefits analysis, employment and income effects,
satisfaction of human needs etc), impacts on the environment
(environmental impact assessment) and techno-economic feasibility
assessed from the point of view of the enterprise.

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4.5.2. Technology Selection

• The choice of technology is influenced by variety considerations

this are: plant capacity, principal inputs, investment outlay and
production cost, use by other units, product mix, and latest
developments, ease of absorption, ecological and environmental
impact.

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• Plant capacity: Often, there is a close relationship between plant
capacity and production technology. To meet a given capacity
requirement perhaps only a certain production technology may
be viable.
• Principal inputs; The choice of technology depends on the
principal inputs available for the project. In some cases, the raw
materials available influence the technology chosen.
• Investment outlay and production cost: The effect of alternative
technologies on investment outlay and production cost over a
period of time should be carefully assessed.
• Use by other units: The technology adopted must be proven by
successful use by other units, preferably in the specific country.

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• Latest developments: The technology adoption must be based
on the latest developments in order to ensure that the likelihood
of technological obsolescence in the near future at least, is
minimized.
• Ease of absorption: The ease with which a particular technology
can be absorbed can influence the choice of technology.
• Sometimes a high level technology may be beyond the
absorptive capacity of a developing country which may lack
trained personnel to handle that technology.

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4.5.3. Appropriateness of technology:

• Appropriate technology should be evaluated in terms of the

following questions:
• Whether the technology utilizes local raw materials?
• Whether the technology utilizes local man power?
• Whether the goods and services produced provide the basic
needs?
• Whether the technology protects ecological balance?

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4.5.4. Acquiring Technology

• When technology has to be obtained from some other

enterprises, the means of acquisition have to be determined.
These can take the form of technology licensing and outright
purchase of technology

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A. Technology licensing: this gives the licensee
(the one who receive the technology) the
right to use the patented technology and get
related know how on a mutually agreed
basis.
B. Outright purchase (purchase of technology):

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4.6 Human Resource and Organization
• The human resources requirement at various levels and during
different stages of the project must be defined as well as their
availability and cost.
• Human resource requirement of the project, the availability of
personnel and training needs, the cost estimates for wages,
salaries other personnel-related expenses are prepared for the
financial analysis of the project.

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Categories and Functions

• Human resources as required for the implementation and

operation of project need to be defined by categories such as
management as supervision personnel and skilled and unskilled
workers and By functions such as general management,
production management, accounting, purchase etc.

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• Timing of Human Resource requirements

1. Pre -production phase:

2. Operational phase:

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Organizational Set-Up/Design

• Organization is a means by which the operational functions and

activities of the enterprises are structured and assigned to
organizational units represented by managerial staff, supervisors
and workforce, with the objective of coordinating and
controlling the performance of the enterprises and the
achievement of its business targets.

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• Human resource requirements of the project will obviously
also depend on:
– The management structure,
– organizational layout,
– operating plan and
– other factors related to the financial and commercial
features of the project.

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• The organizational structure of an enterprise indicates the
delegation of responsibilities to the various functional units of the
company and is normally shown in a diagram.

• Organizations is designed primarily in line with the different

functions in the enterprise such as finance, marketing, purchasing,
and manufacturing.
• However, there is no unique organization pattern. It is also
possible to base organizational structures on products or
productions lines or on geographical areas or markets
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The design of the organization usually includes the following steps:
I. The goals and objectives for the business
II. The functions and tasks that are necessary to achieve the goals
are identified;
III. The necessary functions are grouped or related;
IV. The organizational framework or structure is designed;
V. All key jobs are analyzed designed and described,
VI. A recruitment and training program is prepared.
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• The organizational planner will then have to consider some of
fundamental aspects of optimal organization. These may include:

a. The span of control that is the numbers of employees

reporting to supervisor.

b. The number of organization levels

c. The distribution of responsibilities and authority.

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Assessment of supply and demand

• The following factors should be given due consideration when the

availability and employment of human resources are analyzed:

• The general availability of relevant human resource categories in

the country and the project region. The supply and demand
situation in the project region.

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• Difficulties in the recruitment of key personnel (such as
managers, supervisors and skilled labor) can be dealt with in
different ways:
– Recruitment is combined with intensive training of key
personnel in order to meet quality requirements
– Foreign expertise is recruited.
• An attempt is often made to compensate for the lack of
experience of local managerial talent through the employment of
foreign personnel, either by hiring individual expatriate or by
signing management contracts with foreign companies.

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Training Plan
• Since the lack of experienced and skilled personnel can constitute
a significant bottleneck for project implementation and operation
especially in developing countries, extensive training
programmers should be designed
• Training can be provided at the factory by managerial and
technical personnel and others, by specially recruited experts or
by expatriate personnel.

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• The timing of training programs is of crucial importance since
personnel should be sufficiently trained to be able to take up
their positions as and when required.

• Training requirements should be defined separately for the

preproduction and for the operation phase in order to provide
adequately for production and operational training costs.

Cost Estimates: Estimating the total wage and salary costs.

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4.7 Financial and Economic Analysis

• From a financial and economic point of view, investment can be

defined as a long term commitment of economic resources
made with the objectives of producing and obtaining net gains
(exceeding the total initial investment) in the future.

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4.7.2 Project Cash Flows
• Cash flows are basically either receipt of cash (cash inflow) or
payments (cash outflows)
• Typical operational cash flows for a project are shown below
A. Operational cash outflows
– Increase in fixed assets (investment)
– Operating costs (less depreciation)
– Marketing expenses
– Production and distribution losses
– Corporate (income taxes)
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B. Operational cash inflows
• Revenues from selling of fixed assets
• Sales revenues
• Other income due to plant operations

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• The two methods used to measure projects
financial worthiness are:

1. Discounting Cash Flow Method

2. Non-discounting Cash Flow Method

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1. Non-Discounted cash flow method
A) Payback period
• This is the number of year taken to recover the original (initial)
investment from annual cash flows. The lower the payback
period the better the project is

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2. cash flow discounting in financial evaluation
• The basic assumption underlying the discounted cash-flow concept is
that money has a time value.
• A sum of money available now is worth more than an equal sum
available in the future.
• This difference can be expressed as a percentage rate indicting the
relative change for a given period which, for practical reasons, is usually
a year.

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(a) Net Present Value (NPV) Method
n
Ct
NPV    Io
t 1 (1  K ) t

• Where; Ct = cash flow at the end of period

• K = required rate of return
• n = useful life of project
• Io = initial cost of project
• NPV = present value of cash flow – present value of initial cost

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• Decision criteria for NPV
• NPV > 0, Accept the project – it maximizes
investors wealth
• NPV < 0, Reject the project
• NPV = 0, Indifferent

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• A firm is considering investing in a project which
costs 6,000 Br and has the following cash flows
• YR 1 2 3 4
• C.F 1500 3000 2000 2500
• The cost of capital is 10%and the project has no
salvage value. Using the NPV method advise the
firm on whether to invest in the project

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Decision: Accept the project since NPV >0

YR CF PVIF (10%) P.Vs

1 1500 0.9091 1363.65

2 3000 0.8264 2479.20

3 2000 0.7513 1502.60

4 2500 0.6830 1707.50

Total P.Vs = 7053.00

Less project cost (6000.00)

NPV = 1053.00

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 Chapter Five: Project Implementation,
Monitoring and Evaluation
5.1. Organization
• The primary formal relationships for organizing are responsibility,
authority, and accountability. They enable us to bring together
functions, people, and other resources for the purpose of achieving
objectives. The framework for organizing these formal relationships
is known as the organizational structure.
• It provides the means for clarifying and communicating the lines of
responsibility, authority, and accountability.

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 5.1.1. Line and Staff Organization

 Line managers have the principal responsibility for achieving the

goal of the firm and are vested with decision making authority.

 Staff Managers primarily serve in an advisory capacity

(supportive function).

 Within the staff department they enjoy administrative power.

 The traditional form of organization is quite appropriate for

handling established operations

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 Cont…

• When staff specialists are added to a line organization to "advise;

"serve;” or “support" the line in some manner, we have a line and
staff organization.
• These specialists contribute to the effectiveness and efficiency of the
organization. Their authority is generally limited to making
recommendation to the line organization.
• Sometimes this creates conflict. However, such conflict can be
reduced by having staff specialists obtain some line experience, which
will tend to make them better understand the problems facing the
line managers they support.
• Such functions as human resources management and research and
development are typical staff functions.
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 Cont…

• Most large organizations belong to this type of organizational structure.

These organizations have direct, vertical relationships between different
levels and also specialists responsible for advising and assisting line
managers.

• Such organizations have both line and staff departments. Staff

departments provide line people with advice and assistance in
specialized areas(for example, quality control advising production
department).

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 Cont…

5.1.2. Divisional Organization

• A divisional organizational structure gives a larger business enterprise the
ability to segregate large sections of the company's business into semi-
autonomous groups. These groups are mostly self-managed and focused
upon a narrow aspect of the company's products or services. As with any
organization structure, divisions have both strengths and weaknesses.
• Unlike departments, divisions are more autonomous, each with its own
top executive-often a vice president-and typically manage their own
hiring, budgeting and advertising.
• Though small businesses rarely use a divisional structure, it can work for
such firms as advertising agencies which have dedicated staff and
budgets that focus on major clients or industries.
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 Cont…
5.1.3. Matrix Organization
• It is a permanent organization designed to achieve specific results
by using teams of specialists from different functional areas in the
organization.
• This type of organization is often used when the firm has to be
highly responsive to a rapidly changing external environment.
• In matrix structures, there are functional managers and product (or
project or business group) managers. Functional manager are in
charge of specialized resources such as production, quality control,
inventories, scheduling and marketing. Product or business group
managers are in charge of one or more products and are authorized
to prepare product strategies or business group strategies and call
on the various functional managers for the necessary resources.

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 Cont…
• The matrix organizational structure divides authority both by
functional area and by project. In a matrix structure, each employee
answers to two immediate supervisors: a functional supervisor and
a project supervisor. The functional supervisor is charged with
overseeing employees in a functional area such as marketing or
engineering. Project supervisors manage a specific and often
impermanent project.
• The problem with this structure is the negative effects of dual
authority similar to that of project organization. The functional
managers may lose some of their authority because product
managers are given the budgets to purchase internal resources.
• In a matrix organization, the product or business group managers
and functional managers have somewhat equal power. There is
possibility of conflict and frustration but the opportunity for prompt
and efficient accomplishment is quite high.
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 Cont…

5.2. Project Planning

• Project planning is a rational determination of how to initiate, sustain,
and terminate a project. After the initiation stage, the project is
planned to an appropriate level of detail.

• The main purpose is to plan time, cost and resources adequately to

estimate the work needed and to effectively manage risk during project
execution.

• As with the initiation process group, a failure to adequately plan greatly

reduces the project's chances of successfully accomplishing its goals.
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• Project Planning generally consists of:
• Determining how to plan
• Developing the scope statement
• Selecting the planning team

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 Cont…
-Identifying deliverables and creating the work breakdown structure;
– Identifying the activities needed to complete those deliverables and
networking the activities in their logical sequence;
– Estimating the resource requirements for the activities;
– Estimating time and cost for activities;
– Developing the schedule;
– Developing the budget;
– Risk planning;
– Gaining formal approval to begin work.
• Additional processes, such as planning for communications and for
scope management, identifying roles and responsibilities,
determining what to purchase for the project and holding a kick-off
meeting are also generally advisable.
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 Cont…
• For new product development projects, conceptual design of the operation of
the final product may be performed concurrent with the project planning
activities, and may help to inform the planning team when identifying
deliverables and planning activities.
Why Project Planning?
• One of the objectives of project planning is to completely define
all work required so that it will be readily identifiable to
each project participant.
• This is a necessity in a project environment because:
• -If the task is well understood prior to being performed, much of the work can
be preplanned.
• -If the task is not understood, then during the actual task execution
more knowledge is gained, in turn, leads to changes in
resource allocations, schedules, and priorities.

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 Cont…
• The more uncertain the task, the greater the amount
of information that must be processed in order to ensure effective
performance.
• These considerations are important in a project environment
because each project can be different from others,
requiring a variety of different resources, but having to
be performed under time, cost, and performance
constraints with little margin for error.
• There are four basic reasons for project planning:
-To eliminate or reduce uncertainty
-To improve efficiency of the operation
- To obtain a better understanding of the objectives
- To provide a basis for monitoring and controlling work

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 Cont…

• Planning is decision making based upon futurity. It is

a continuous process of making entrepreneurial decisions with an
eye to the future, and methodically organizing the effort needed to
carry out these decisions.
• Furthermore, systematic planning allows an organization to set
goals. The alternative to systematic planning is decision making
based on history.
• This generally results in reactive management leading to
crisis management, conflict management, and fire fighting.

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 5.3 Project Control
 Project Control is a formal process in project management.
 The PMBOK defines Project Control with the following statement:
 “A project management function that involves comparing actual
performance with planned performance and taking appropriate
corrective action (or directing others to take this action) that will
yield the desired outcome in the project when significant differences
exist.”
 Project Control involves the regular review of metrics and reports
that will identify variances from the project baseline. The variances
are determined by comparing the actual performance metrics in the
execution phase against the baseline metrics assigned during the
Planning Phase.
 These variances are incorporated into control processes to evaluate
their meaning.

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 Cont…
 If significant variances are discovered(variances that place the
completion of the project in jeopardy) adjustments are made to the
project plan.
 A significant variance does not explicitly require a change to the
project plan but these variances should be reviewed to determine if
preventative action is necessary.
 Controlling also includes taking preventative action in anticipation of
possible problems.
 Project Control is important because it may determine the success
of the project by the stakeholders.
 Project success relates to project cost, completion date, customer
expectations, performance, etc.

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 Cont…
The Project Control Process
• Controlling procedure need to address such questions:
• Are we on planned track?
• Are we on expected budget?
• Are we on planned schedule?
• Are we delivering what we said we would?
• Are we meeting quality and performance standards?
• Are we meeting stakeholder expectations?
• What have we accomplished?
• Will the project objectives be met?
• What deviations/variances exist?
• What corrective actions are we taking?

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 Cont…
• The project control includes project status reporting, schedule control,
cost control, quality control and risk control.
• Controlling process consists of following steps:
Establish A Baseline of Measurement:
• The baseline of measurement is actually represented by your project
plan. This includes your control schedule, project budget, and any
design or performance specifications related to project deliverables.
• The estimates embodied in these documents create the basis from
which variance is measured. The success of project measurement and
control depends on how accurate estimated baseline is? What if an
estimate is wrong? What if an element of your baseline is a poor
representation of what’s actually achievable?
• In case of variance it is difficult to know who is responsible for
variance, estimator or task performer.

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 Cont…
• The baseline is derived from the cost and duration information found in
work breakdown structure and scheduling decisions.
Measuring Progress and Performance:
• Time and Budget are two quantitative measures. Many methods are
available to measure these two. Qualitative measures (i.e. technical
specification, production function, reliability etc.) are difficult to
measure. Tracking time performance is easier than monitoring budgets.
• Some of valuable and essential control techniques are:
• Gantt Chart
• Control Chart
• Critical Path Method (CPM)
• Program Evaluation and Review Technique (PERT)
• Critical Ratios

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 Cont…
Analyzing the Performance:
• Almost all the projects need to be guided right throughout in order to
receive the required and expected output at the end of the project.
• Project status report must be generated on every week or every
month. Comparisons of actual and expected(planned) must be done
for proactive correction.
Variances
• Variances are deviations from plan. Think of a variance as the
difference between what was planned and what actually occurred.
There are two types of variances: positive variances and negative
variances.
• Positive variances: Positive variances are deviations from plan that
indicate an ahead-of-schedule situation has occurred or that an actual
cost was less than a planned cost.

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 Cont…
• This is a good news to the project manager, who would rather hear
that the project is ahead-of-schedule or under budget.
• Positive variances bring their own set of problems, which can be as
serious as negative variances. Positive variances can allow for
rescheduling to bring the project to completion early, under budget
or both. Resources can be reallocated from ahead-of- schedule
projects to behind-schedule projects.
• Positive variances can also result from schedule slippage. Consider
budget. Being under budget means that not all dollars were
expended, this may be the direct result of not having completed
work that was scheduled for completion during the period.
• Negative variances: Negative variances are deviations from the plan
that indicate a behind-schedule situation has occurred or that an
actual cost was greater than a planned cost.

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 Cont…
• Being behind a schedule or over budget is not what the project
manager wants to hear. Negative variances, just like positive
variances, are not necessarily bad news. For example, you might
have over spent because you accomplished more work during the
report period than was planned.
• But, in over spending during this period, you could have
accomplished the work at less cost than was originally planned.
• In most cases, negative time variances affect project completion
only if they are associated with critical path activities or if the
schedule slippage on non critical path activities exceeds the
activity’s total float.
• Negative cost variances can result from uncontrollable factors such
as cost increases from suppliers or unexpected equipment
malfunctions. Some negative variances can result from
inefficiencies or error.

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 Cont…
Project Control Techniques
• Gantt Chart: A Gantt chart, commonly used in project management,
is one of the most popular and useful ways of showing
activities(tasks or events) displayed against time. Typically, tasks are
shown on the vertical axis, and the project time span is represented
on the horizontal axis.
• Each task has a corresponding bar that shows the time span
required for that task. The bar can be filled in to show the
percentage of the task that has been completed.

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 Cont…
• Gantt Chart represents:
• What the various task/ activities are?
• When each activity begins and ends?
• How long each activity is scheduled to last?
• Where activities overlap with other activities, and by how much overlap?
• The start and end date of the whole project?
• Control Chart: Control chart is an efficient way of analyzing
performance data to evaluate a project process. Control charts, also
known as Shewhart charts named after Walter A. Shewhart. Every
process has variation. Some variation may be the result of causes which
are not normally present in the process. Some variation is simply the
result of numerous, ever-present differences in the process.

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 Cont…
• The control chart is a graph used to study how a process changes
over time. Data are plotted in time order. A control chart always has
a central line for the average, an upper line for the upper control
limit (for ahead from scheduled) and a lower line for the lower
control limit(for behind the schedule).
• These lines are determined from historical data. By comparing
current data to these lines, we can draw conclusions about whether
the process variation is consistent(in control) or is
unpredictable(out of control, affected by special causes of
variation).
• One goal of using a Control Chart is to achieve and maintain process
stability.

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 Cont…
• The control chart is used to:
-Monitor effects of the variables on the difference between target
and actual performance of project.
-Analyze and understand process variables
-Determine process capabilities.
• Critical Path Method: The Critical Path Method or Critical Path
Analysis is a mathematically based algorithm for scheduling a set of
project activities. It is an important tool for effective project
management. Critical path method commonly used with all form of
projects, including construction, software development, research
project, product development, engineering and plant maintenance,
among the others.

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 Cont…
• Any project with the interdependent activities can apply this
technique of scheduling.
• Critical path method is based on mathematical calculations and it is
used for scheduling project activities. In the critical path method,
the critical activities of a program or a project are identified. These
are the activities that have a direct impact on the completion date
of the project.

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 Cont…
Key Steps in Critical Path Method:
1. Identifying the key activities of project
2. Determining the Sequence of Activities
3. Drawing Network Diagram
4. Time estimate for each activity
5. Identifying the Critical Path: The critical path is the longest path of the
network diagram. The activities in the critical path have an effect on
the deadline of the project. If an activity of this path is delayed, the
project will be delayed.
• Program Evaluation and Review Technique: CPM assumes low
uncertainty in scheduled timings. The Program Evaluation and Review
Technique(PERT) is a network model that allows for randomness in
activity completion times. PERT was developed in the late 1950's for the
U.S. Navy's Polaris project.
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 Cont…
PERT process involves following steps:
• Specifying the task/activities
• Determining the sequence of activities
• Constructing Network Diagram
• Estimate the Time
• Critical Path
• Update the PERT chart
• There are three estimation times involved in PERT; Optimistic Time
Estimate(O), Most Likely Time Estimate(M), and Pessimistic Time
Estimate (P).
• Optimistic Time Estimate: This time assumes that everything will go
according to plan and with minimal difficulties.
• Most Likely Time Estimate: This is the time that, in the mind of the
functional manager, would most often occur should this effort be
reported over and over again.
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 Cont…
• Pessimistic Time Estimate: This time assumes that everything will
not go according to plan and maximum difficulties will develop.
• Critical Ratios: Schedule Performance Index(SPI) and Cost
Performance Index(CPI) ratios are critical tools in project
management.
• The budget(Cost) and the schedule (Time) are two important
considerations in any project, and since projects that overrun
budgets and time frames are not viable for organizations. SPI and
CPI ratios are generated from Earn Value System.
• Schedule Performance Index:
• The ratio of schedule efficiency that indicates the percent of work
performed out of the total work scheduled. A number less than 1
indicates that the project is behind schedule.
• SPI= EV/PV
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 Cont…
• Cost Performance Index:
• The ratio of cost efficiency or value earned per unit actual cost. A
number less than 1 indicates that the project is spending more money
than budgeted.
• CPI= EV/AC
• Lastly, compare the schedule and cost performance indices to each
other to determine
• The Critical Ratio (CR), CR = SPI x CPI
• Where:
• SPI= Schedule Performance Index
• CPI=Cost Performance Index
• EV=Earned Vale (Budgeted Cost of Work Performed)
• PV= Planned Value (Budgeted Cost of Work Scheduled)
• AC=Actual Cost (Actual Cost of Work Performed)
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 Cont…
5.4. Human Aspects of Project Management
 For the successful execution of a project, a satisfactory human
relation is must without such a system other systems of project
management do not work well.
 To achieve satisfactory human relations in the project setting, the
project manager must successfully handle problems and challenges
related to: Authority, Orientation, Motivation, Group functioning.
 Authority: In project management, the project manager whose
activities cut across functional lines of command, lacks the desired
formal authority.
 While the manager has formal control emanating from contracts
and agreement:" as far as outside agencies involved in project work
are concerned, in his own organization he has to be contacted with
split authority, and dual subordination.
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 Cont…
 His effective authority would stem from his ability to develop
rapport with the project personnel, his skill in professional
reputation and stature, his skill in communication and persuasion.
 Orientation: Most of the managers, working for a project are
engineers or technologist when an engineer assumes managerial
responsibility, he faces some different type of problems, which he is
supposed to:
 -Perform the task of planning, organizing, directing and controlling
the resources of the firm in the world of uncertainty.
 -Adopt a more creative approach to solve non program and
unstructured problems.
 -Attach greater importance to efficient utilization of resources and
resolution of human relation problem. Thus, for achieving the task
he must himself be an accomplished engineer turned manager.

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 Cont…
• Motivation: The project manager works within the boundaries of a
socio-technical system. The principal behavioral factor, which he
can influence, is the motivation of the project personnel.
• In order to succeed in motivating project personnel, the project
manager must be a perceptive observer of human beings, must
have the ability to appreciate the variable needs of human being,
must have a skill in several styles of management suitable to
different situations.
• Group Functioning: For building an effective group the company
must presume a genuinely participative style of management.
• With the managerial philosophy the project manager can facilitate
the development of mutual trust and acceptance, open
communication, co-operation and project attitude.

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 Cont…
• In this task the needs leadership capabilities, sensitivity to human
nature, perceptiveness, concern for welfare of others, maturity and
impartial approach. Actually this is difficult and challenging task.

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 Cont…
5.5. Pre -requisites for Successful Project Implementation
• Project execution has a direct correlation to project progress and
stakeholder’s expectations but, time and cost over runs of the
project are the main hurdles in successful implementation of a
project.
• This problem is very common especially in the public sector. Due to
such time and cost over runs, projects tend to become
uneconomical, resources are not available to support other projects
and overall development is adversely affected.
• To minimize time and cost over runs and thereby to improve the
prospects of successful completion of projects, following things can
be done:
• 1)Adequate formulation of the project

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 Cont…
2.Sound project organization.
3. Timely availability of funds.
4. Better contract management.
5. Use of the principle of responsibility accounting.
6. Proper planning for implementation.
7. Judicious tendering and procurement of required equipments.
8. Advance actions and effective monitoring.

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4.5 Technology and Engineering Study
Assessment of technology required
• The primary goals of technology assessment are to determine and evaluate the impacts of different technologies on the society and
national economy (cost-benefits analysis, employment and income effects, satisfaction of human needs etc), impacts on the
environment (environmental impact assessment) and techno-economic feasibility assessed from the point of view of the enterprise.
To allow the careful assessment of the suitability of the technological alternatives a logical sequence should be followed: Problem
identification, technology description and project layout, technology market and alternatives, assessment of availability, technology
forecast, assessment of the local integration, description of the social economic impact, environmental impact assessment
• Problem identification
• The technology required is defined not only by the marketing concept and the available raw material and factory supplies but also by
various social economic, ecological financial commercial and technical conditions. Problem identification should identify, describe and
assess the critical elements of the technology required. Special consideration should be given to existing or possible future constraints
on the acquisition and use of available technologies to further development needs and to the possibility of feasible technological
alternatives.
• Technology description and project layout
• The preparation of a plant layout and design is essential for every project. The first initial stage should be the preparation of a
preliminary project plan and layout on the basis of the production activities and the technologies alternative envisaged. These second
stage of project layout and design can only be drawn when the details relating to technology plant capacity and machine specification
are finalized.
• The preliminary project layout should include several charts and drawings, which need not be according to scale, but which would
define the various physical features of the plant and their relationship with one another. For most projects, functional charts and
layout drawing at this stage should include the following:
• General functional layout, defining the principal physical or location features and flow relationships of machinery and equipment, civil
works and construction and various ancillary and service facilities

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6. Production Program and Plant Capacity
 The production program, range and volume of products to
be produced depend on the market requirements,
proposed marketing strategy and the availability of
resources.
 A production program should define the levels of output
to be achieved during specified periods related to the
sales forecast.

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 …Cont’d

(2)Delphi Method: This method is used for eliciting the opinions of a group of
experts with the help of a mail survey.

The steps involved in this method are:

(i) A questionnaire is sent to a group of experts by mail and asked to express their views.
(ii) The responses received from the experts are summarized without disclosing their
identity, and sent back to the experts meant to probe further reasons for extreme views
expressed in the first round.
(iii) The process may be continued for one or more rounds till reasonable agreements
emerges in the views of the experts.

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 …Cont’d

II. Time Series Projection Methods

(1) Trend Projection Method

Trend projection method involves the following steps:
(i) Determine the trend of consumption by analyzing past consumption
statistics
(ii) projecting future consumption by extrapolating the trend.
NB. When the trend projection method is used the most commonly
employed relationship is the linear relationship.

Y = a + bX

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 …Cont’d

Where; Y = Trend value

a = Intercept of the relationship
b = Slop of the relationship
X = Independent variable (time)

b = ∑xy – n ̅XῩ
∑x2 – n̅ X2

a = Ῡ – b̅X
Where, ̅X = Mean of X
Ῡ = Mean of Y

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 …Cont’d

Advantages of the LSM

(i) It uses all the observations
(ii) The straight line is derived by an objective, statistical procedure
(iii) A measure of goodness of fit is available
Disadvantages of LSM
(i)It is more complex compared to other methods

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 …Cont’d

(2) Exponential Smoothing Method:

 In this method forecasts are modified in the light of observed errors.

 Ft+1 = Ft + α (Dt – Ft), or,

 Ft + 1 = α Dt + (1 - α ) Ft

Where; α = weitage factor for the current demand (the smoothing parameter
which lies between 0 and 1).
Dt = demand during the present period
Ft + 1 = Forecast for next period t
Ft = Forecast of demand made for the present period

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 …Cont’d

(3) Moving Average Method:

 In this method, the forecast for the next period is equal to the average of sales
for several preceding periods.

(III) Causal Methods:

 This method assumes that demand is related to some underlying factor(s) in
the environment, and that cause-and-effect relationships are at work.

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 …Cont’d

f. Uncertainties in Demand Forecasting

Demand forecasts are subject to error and
uncertainty which arise from three principal sources:

 Data about past and present market

 Methods of forecasting
 Environmental change

g. Market Planning. Prepare a marketing plan for the new product. A

marketing plan usually has the following components:
 Current market situation
 Opportunity and issue analysis,
 Objectives
 Marketing strategy
 Action program

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 …Cont’d

4. Raw Materials and Supplies Study

 Different materials and other inputs required for operating the
project should be identified and their availability, supply and
method of estimating operating costs should be analyzed.

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  In this part of the feasibility study the following can be included:-
i. Identification of the type of raw materials and supplies to be used in the
project.
ii. All requirements of materials and supplies should be identified and
specified in the study considering all socio, economic, commercial,
financial, and technical factors.
iii. The source of materials availability, their users and price of inputs are to
be analyzed. The interdependencies between projects, material and input
requirements and supply of these items should be considered.
- location of the available resources, area of supply, access to
transport, transport costs and alternate usage of such materials
need to be collected.

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 …Cont’d

iv. Costs of raw materials and supplies:-

– The costs of materials and other supplies have to be analyzed in
detail to determine project economies.
– Estimating annual operating costs for materials and supplies are to
be made explaining the price mechanisms and key factors affecting
prices.
– Cost estimates may be expressed either as the cost per unit
produced or in terms of a certain production level to conduct
sensitivity analysis.

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 …Cont’d
5. Location, Site and Environmental Impact Assessment
5.1. Location
 Location analysis has to identify locations suitable for the
industrial project under consideration.
 Traditional approach to industrial location focused, on the
proximity of raw materials and market place, mainly with the
intention of minimizing transport costs. However, the modern
view requires consideration of not only commercial, technical
and financial factors, but also of the social and environmental
impact a project might have.
 A project potentially located in a number of alternative regions
(several alternative locations may have to be considered).

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  The choice of location is influenced by a variety of
considerations:
 Proximity to raw materials and markets
 Availability of infrastructure
 Availability of labor (especially for labor-intensive projects)
 Technological and process characteristics
 Government policies, and
 Other factors like climatic conditions, ease in coping with pollution,
general living conditions, etc.

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 …Cont’d

 In terms of a basic location model, the optimum location is one

where the total cost viz., transportation cost, production cost and
distribution costs is minimized. This generally implies that:
(i) Projects based largely on imported material may need to be located at
ports or near terminals.
(ii) A project producing perishable products or agro-processing industries are
market oriented and it is advantageous to locate such production near the
major consumption centers.
(iii) A resource-based projects like a cement plant or a steel mill should be
located close to the source of basic material.
(iv) Petroleum products and pharmaceutical can be located at source or near
consumption centers or even at some intermediation point.

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 …Cont’d

 As far as financial feasibility of alternative locations is

concerned, the following data-as well as related
financial risks, should be assessed.
 Production costs (including environmental protection
costs)
 Marketing costs
 Investment costs
 Revenues
 Taxes, subsidies, grant and allowance
 Net cash flows

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 5.2 Site Selection
 Once the location is decided upon, a specific project site alternative
should be defined in the feasibility study. This will require evaluation of
the characteristics of each site.

 When selecting sites within the selected location, the following

requirements and conditions are to be assessed:-
 Ecological conditions on site (soil, site hazards, climate etc)
 Environment impact (restrictions, standards, guidelines)
 Socio-economic conditions (restrictions, incentives, requirements)

2/12/2025 217
 …Cont’d

 Local infrastructure at site location (existing industrial infrastructure,

economic and social infrastructure, availability of critical project inputs
such as labor and factory supplies)
 Strategic aspects (corporate strategies regarding possible future
extension, supply and marketing polices
 Cost of land
 Site preparation and development requirements and costs.

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 …Cont’d

 Topography, altitude and climate may be important for a project as well as

access to water, electric power, roads and railways transport.
 Recruitment of managerial staff and labor may be a critical factor for the
viability of the project. Development of housing, schools, medical and
social center is necessary to attract the required staff and labor force.

NB: Plant location and site selection can be undertaken simultaneously.

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 5.3 Environmental Impact Assessment
 Is designed to develop an understanding of the environmental
consequences of newly planned or existing projects and of any
project related activities.

 EIA is part of project planning process. Environmental benefits or

costs are usually externalities or side effects that affect the society
in whole or in part.

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 6. Production Program and Plant Capacity
 The production program, range and volume of products to be
produced depend on the market requirements, proposed marketing
strategy and the availability of resources.
 A production program should define the levels of output to be
achieved during specified periods related to the sales forecast.
 Full production level may not be possible during initial production
operation owing to various technological, production and
commercial difficulties in addition to marketing bottlenecks.
Normally a production and sales target of 40-50 percent of the
capacity for the first year is considered reasonable. Picking up
gradually, towards third or fourth year full production level can be
achieved.

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  With regards to plant capacity, generally two capacity
terms used in relation to level of operation.

1. A feasible normal capacity (FNC) – refers to the capacity achievable

under normal working conditions considering the technical
conditions of the plant, normal stoppages, downtime for
maintenance & tool changes, holiday’s, shift pattern and
management system applied.
2. A nominal maximum capacity(NMC)– is the technically feasible
capacity that corresponds to the installed capacity as guaranteed by
the supplier of the plant.

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 7. Technology Selection
 Appropriate technology selection should be made.
 The advocates of appropriate technology urge that the
technology should be evaluated in terms of the following
questions:
 Whether the technology utilizes local raw materials?
 Whether the technology utilizes local manpower?
 Whether the technology protects ecological balance?
 Whether the goods and services produced satisfy to the basic
needs?

2/12/2025 223
 …Cont’d

 While selecting the best technologies for the proposed

project, the following factors must also be given due
attention:

 Technological impact on the environment: The technology

that we are going to select should not only the one that
minimizes pollution, but should also preserve the natural
resources and saves renewable resources.
 Careful evaluation and assessment of hazardous
technologies and the use of toxic materials at different
stages of production should be made.

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  Introduction of obsolete technologies must also be carefully considered.
Acquisition of previously discarded and disassembled production plants
should be rechecked carefully.

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 8. Organization and Human Resource

 A division of the Company into organizational units, in line with the

marketing, supply, production and administrative functions is
necessary for efficient management of operations and designing a
proper organizational structure in accordance with the corporate
strategies and policies.

 The recommended organization will depend on the social

environment as well as techno-economic necessities. The
organizational set-up depends to a large extent on the industrial,
enterprise, strategies, polices and values of those in power in the
organization.

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  A design of the organization usually includes the following
steps:
1. Goals and objectives of the business are stated
2. Then functions are identified
3. Functions are grouped or related
4. Organizations structure or framework designed
5. All key jobs are analyzed, designed, and described
6. A recruitment and training program prepared.

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  The two reasons for preparing an organization:-
1. To achieve optimal coordination and control on all project inputs.
2. To structure the investment and production costs and to determine
the costs linked with corresponding organizational units.

8.1 Organizational Structure

 Usually the organization structure is designed primarily in line with the
different functions. Such as finance, marketing, production and
purchasing. However, there is no unique organizational pattern.

2/12/2025 228
 Cont.

8.2 Human Resource

 The successful implementation and operation of industrial projects need
different categories of human resources. Example, management,
supervisory staff and workers- with sufficient skill and experience.

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  The following factors should be given due consideration when the
availability and employment of human resources are analyzed:-
i. The general availability of relevant human resource categories in
the country and the project region.
ii. The supply and demand situation in the project region
iii. Recruitment policy and methods
iv. Training policy and program

2/12/2025 230
 …Cont’d

NB. Difficulties in the recruitment of key personnel (such as Managers,

supervisors and skilled labor) can be dealt with, in different ways:-
1. Recruitment is combined with intensive training of key personnel in
order to meet quality requirements.
2. Foreign expertise is recruited.

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 9. Financial and Economic Analysis:
 Since reliable cost estimates are fundamental to the
appraisal of an investment project it is necessary to
check carefully all cost items that could have a
significant impact on financial feasibility.
 Cost estimates cover:-
 Initial investment cost
 Cost of production
 Marketing and distribution costs
 Plant and equipment replacement costs
 Working capital requirements and decommissioning at the end
of the project life.

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 9.1 Initial Investment Cost
 Initial investment costs are the total of fixed assets (fixed asset costs
plus pre-production expenditures) and net working capital, with fixed
assets constituting the resources required for constructing and
equipping an investment project, and net working capital
corresponding to the resources needed to operate the project totally or
partially.

9.1.1 Pre-production Expenditures:

 In every industrial project certain expenditures are incurred prior to
commercial production. They are:-

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 i. Preliminary capital – issue expenditures: these are expenditures incurred
during the registration and formation of the company. Eg. Legal fees,
preparation and issue of a prospectus, ad, public announcement,
brokerage commission, etc.
ii. Expenditures for preparatory studies: these includes expenditures for
pre-investment studies like opportunity and feasibility and other
expenses for planning the project.
iii. Other pre-production expenditures: like
- Salaries, fringe benefits and social security contributions of personnel
engaged during the pre-production period.
- Travel expenses
- Preparatory installations, such as work camps, temporary offices and
stores.

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 iv. Cost of trial-runs, start up and commissioning expenditures. These
include:
 Fees payable for supervision or start up operations,
 wages, salaries, social security contributions of personnel
employed,
 consumption of production materials and supplies, utilities and
other incidental start up costs.

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 9.1.2 Fixed Assets
 Fixed investment costs should include the following main cost items:
 Land purchase, site preparation and improvements,
 Building and civil works
 Plant machinery and equipment including auxiliary equipment
 Other assets like industrial property rights and lump sum payments
for know-how and patents.

9.1.3 Net working capital

 Net working capital is defined as current assets minus current liabilities.

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 9.2 Production Cost
 It is essential to make realistic forecasts of production and
manufacturing cots for a project proposal in order to determine the
future viability of the project.
 Production costs should be determined for the different levels of
capacity utilization. The production costs are classified into four major
categories. They are:
 Factory costs
 Administrative overhead costs
 Depreciation and cost of financing
 Operating Cost (the sum of factory and administrative overhead
costs).

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 9.3 Marketing Costs:
 Marketing costs comprise the costs for all marketing activities and may
be divided into direct marketing costs and indirect marketing costs.

 Direct marketing costs – are costs for packaging and storage, sales,
product advertisement, transport and distribution costs.

 Indirect marketing costs – are costs related to marketing

department. They are salaries for personnel, materials and
communication, market research, public relation and promotional
activities.

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 9.4 Cash Flow Statement

 The cash flow statement shows the movement of cash into and out of
the firm and its net impact on the cash balance within the firm.

2/12/2025 239
 …Cont’d

9.5 Financial Evaluation

• Ranking projects and measuring their profitability have replaced
evaluation based on inadequate planning and subjective judgment.
Quantitative methods were developed to use in evaluating
proposed projects.
• There are two investment evaluation methods (criteria)
I. Discounting criteria – include NPV, IRR, Benefit-Cost consideration
II. Non-discounting criteria – include payback period and ARR

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 I. Discounting Methods (Criteria)

A. Net Present Value Method

– The net present value (NPV) has certain properties that make it a very attractive
decision criterion.

– The NPV method is a discounted cash flow method. In this method all net cash
inflows are discounted to present value using the required rate of return and is
then compared with the initial outlay

– If the discounted cash flow exceeds the initial outlay it means the project
investigated is attractive since it is expected to earn more than the required rate
of return.

NPV = CF1 + CF2 + CF3---------- + CFn - ICO

(1+r)1 (1+r)2 (1+r)3----- +(1+r)n

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 Where CF= cash inflow per period (year)
r= discount rate
ICO= initial cash outlay

Decision Criteria
 If NPV is greater than zero accept the project
 If NPV is less than zero reject the project

Advantages
1. time value of money is considered
2. It measures the benefits directly
3. It is an objective method of selecting and evaluating projects(By
considering cash flows, NPV is not affected by the Co.’s accounting policies,
unlike net profit).

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 …Cont’d

Limitations
1. The NPV method does not consider the life of the project. Hence, when
mutually exclusive projects with different lives are being considered,
the NPV rule is biased in favor of the longer term project.
2. In practice it may be difficult to determine the discount rate. This
should relate to the cost of finance, but calculating the costs of the
different elements of finance (share capital and loans)is difficult.
3. The NPV is an absolute figure and it does not consider for the size of the
project.

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 …Cont’d

Example
To illustrate the calculation of the NPV consider a project
which has the following cash flow streams.

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 Year Cash Flow

0 $(1,000,000)

1 200,000

2 200,000

3 300,000

4 300,000

5 350,000

The cost of capital, r, for the firm is 10%. The NPV of proposal is?

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 …Cont’d

NPV=Io - 200,000+200,000+300,000+300,000+350,000
(1.10)1 (1.10)2 (11.10)3 + (1.10)4 + (1.10)5

= -Br. 5,273

 The NPV represent the net benefit over and above the
compensation for the time and risk

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 …Cont’d

B. Internal Rate of Return (IRR)

• It is another DCF method, which represents the actual rate of return
when profit and time value of money are taken in to account
• It is the rate that equates the present value of cash inflow with the
present value of cash outflow of an investment.
• It is the discount rate which makes its NPV equal to Zero.

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 …Cont’d

• Hence, the question will be searching for the discounting rate that equates
the PV of the investment and cash inflows. That is why IRR is some times
called the internally generated rate of return. Mathematically, IRR will be
obtained when;

IO - PV (NCF) = O

o The primary decision rule with IRR is to accept only projects with an IRR
greater than the discount rate.

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 … Cont’d

Example
To illustrate the calculation of IRR, consider the
cash flows of a project being considered by X
Company.

Year 0 1 2 3 4

CFs $(100,000) 30,000 30,000 40,000 45,000

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 o The IRR is the value of r which satisfies the following equation:

30,000 + 30,000 + 40,000 + 45,000

(1+r)1 (1+r)2 (1+r)3 (1+r)4

• The calculation of r involves a process of trial and error. We try different

values or r till we find that the right-hand side of the above equation is
equal to $100,000. Let us, to begin with, try r=15%. This makes the right-
hand side equal to:

30,000 + 30,000 + 40,000 + 45,000 = 100,802

(1.15)1 (1.15)2 (1.15)3 (1.15)4

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 Cont.

– This value is slightly higher than our target value

$100,000. So we must increase the value of r from 15% to 16%.
(In general a higher r lowers and a smaller r increases the right
hand side value).

– The right hand side becomes:

30,000 + 30,000 + 40,000 + 45,000 = 98,641

(1.16)1 (1.16)2 (1.16)3 (1.16)4

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 • Since this value is now less than $100,000 we conclude that the value
of r lies between 15% and 16%. For most of the purposes this
indication is sufficient, but if a more refined estimate of r is needed,
use the following procedures.

1. Determine the NPV of the two closest rates of return

(NPV/15%) = - 802
(NPV/16%) = + 1,359
2. Find the sum of the absolute values of the NPVs obtained in step 1
802 + 1,359 = 2,161
3. Calculate the ratio of the NPV of the smaller discount rate, identified in step
1, to the sum obtained in step 2.
802/2,161= 0.37

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 15+0.37 = 15.37 Percent

• The IRR, calculated in this manner, is a very close approximation to the

true internal rate of return.

• The decision rule for IRR is as follows:

ACCEPT: if the IRR is greater than the cost of capital

REJECT: if the IRR is less than the cost of capital

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 …Cont’d
Class Work
A project has a total outlay of Br. 500,000 with the following pattern of
cash inflow. Compute the IRR of the project

Year 1 2 3 4 5
CFs 120 120 120 150 150

(in thousands)

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 …Cont’d
Solution
i. Find (guess) the starting rate
500000/120000=4.167=7%
500000/150000=3.333=15%
ii. A better approximate (guess) can be found by

0.07+0.15 = 11% or 0.11

2
iii. Compute the PV of the cash flow at this rate,
120,000x2.444 = $293,280
150,000x0.659 = 98,850
150,000x0.593 = 38,950

PVCF ………………….481,080
Io ……………………….500,000
NPV …………………… $-18920

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 …Cont’d

• Now, NPV is negative, which means the actual IRR is less than 11%. The
following are the next trials at 9% and 10%
9% 10%
120,000x2.531=303,720 x2.487=298,440
150,000x0.708=106,200 x0.683=102,400
150,000x0.650=97,000 x0.621=93,150

507,420 494,040
-500,000 -500,000
NPV……... +7,420 -5,960

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 …Cont’d
iv. Now, IRR is above 9% but below 10%; apply interpolation to
approximate the true IRR,
7420 = 0.55
13380
Thus, IRR 9.55%

Exercise
 A project requires a new investment of 20,000 and produces the
following cash flows. Compute the IRR of the project

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 …Cont’d

Year 1 2 3 4 5
CFs 5000 4000 3000 2000 8000

NPV Vs IRR
 For making choice between two projects competing for
the funds at the disposal of a concern, the NPV method
can give a better choice because it can give idea of
ranking of the projects.

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 …Cont’d
Advantages of IRR
(1)Like NPV, it deals with discounted cash flows and is
based on the time value of money.
(2)The difference between the IRR and the cost of capital
indicates the additional return for risk that the project
provides.

Disadvantages of IRR
(1)If there are negative annual cash flows later than year
0, this may lead to more than one possible IRR. In such
a case, IRR must be used with great care.
(2)If a firm has to rank mutually exclusive projects,
choosing the project with the highest IRR may result in
suboptimal outcome.
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 …Cont’d
C. Benefit-Cost Ration (Profitability Index)
• The profitability index, also called benefit - cost ratio, is the
ratio of the PV of the future net cash inflows to the initial
outlay of the project.
• It measures the desirability of the project and evaluates the
worth of an investment.

PI= PV (NCF)
PV (IO)
• In the application of PI, a project is accepted if PI > 1, rejected
if PI < 1 and we remain indifferent if PI = 1. It should be noted
that when PI > 1, NPV is positive; PI < 1, NPV is negative and
PI=1 when NPV is zero.

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 …Cont’d
Example
After tax cash flows of a small scale tannery project is given
below. Find the profitability index if discount rate is assumed to
be 12%?

Year 0 1 2 3 4 5

CFs 40,000 15,000 14,000 13,000 12,000 11,000

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 …Cont’d
Solutions
Year Cash Flow Rate = (12%) PV
1 15,000 0.893 13,395

2 14,000 0.797 11,158

3 13,000 0.712 9,256

4 12,000 0.636 7,636
5 11,000 0.567 6,237
Total 47,678

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 …Cont’d

Therefore, PI= 47,678 = 1.192

40,000

II. Non-Discounting Criteria

A. Payback Period
– It is one of the most popular and widely used method
– It is defined as the number of years required to recovery the
original cash outlay invested in a project
– The payback period can be calculated using the following
formula:

PBP = Total Investment

Annual Cash Flow

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 …Cont’d
Example 1
If a project has an investment of Br. 60,000 and annual cash inflow is Br.
15,000 per year for 10 years. Compute the PBP?

PBP = 60,000/15000= 4 years

Example 2
If the project cash inflow is not in “annuity form”, cumulative cash
inflow method may be used to compute that PBP. Assuming an initial
investment of Br. 30,000 for the following stream of cash flows and
compute the PBP.

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 …Cont’d
Year Cash inflows Cumulative

1 10,000 10,000
2 8,000 18,000
3 12,000 30,000
4 7,000 37,000
5 9,000 46,000
6 3,000 49,000

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 Cont.

Hence, PBR, is 3 years

Example 3
If the project cumulative cash flow does not exactly match to
the investment outlay, but in annuity form of inflow, then
compute the PBP in the following way (assuming initial
investment of $10,000)

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 …Cont’d
Year Cash inflow Cumulative
1 4,000 4,000
2 4,000 8,000
3 4,000 12,000
4 4,000 16,000
5 4,000 20,000

PBP = 10,000 = 2.5 Years

4000

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 …Cont’d

Example 4
In case the cumulative inflow does not exactly match
the amount of investment and the inflow is not in
annuity form use the interpolation method (assume an
investment outlay of 15,000); compute the PBP.

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 …Cont’d
Year Cash in flow Cumulative

1 3,000 3,000
2 5,000 8,000
3 10,000 18,000
4 2,000 20,000
5 4,000 24,000

PBP = 2+ (12 months x 7000)= 2 years and 8

months or 28/12
10,000 years
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 …Cont’d
Advantages of Payback Period
(1)Applying the technique and understanding the concept
is easy to understand
(2)It is quick and simple to use

Disadvantages of Payback Period

(1)It ignores the cash flows that occur after the payback
period. This weakness of the PBP is in stark contrast to
both NPV and IRR that consider all cash flows
generated by projects.
(2)It ignores the time value of money. (Of course, this can
be overcome by the use of discounted payback in which
the cash flows are discounted prior to calculating the
payback period).

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 …Cont’d
Example (Discounted Payback)

Year Cash flow PV@10% Cumulative PV

0 ─ 1000 ─ 1000 ─ 1000
1 600 545 ─ 455
2 400 330 ─ 125
3 300 225 + 100
4 300 205 + 305
The discounted payback period for Project A given an estimate of
2 years, is:
2 years + 125∕225 * 12 months

2 years and 6.7 months

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 …Cont’d
Discounting is particularly useful when cash flows
are distant, whereas payback emphasizes the early
years of the project, so there is an inherent conflict
in the technique.

Also, discounting assumes that the cash flows

occur at the end of the year whereas payback
assumes that they flow evenly throughout the year.

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 …Cont’d

B. Accounting Rate of Return (ARR)

 This method uses accounting information, as presented by
financial statements, to measure profitability of
investment.
 It is sometimes known as Average Rate of Return and calculated
by dividing the average income after tax by the average
investment of project.

ARR= Average income x 100 or Average Income

Average investment Total Investment

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 …Cont’d
• Decision Criteria
– Projects which have an ARR equal to or greater than a pre-
specified cutoff rate of return ─ which is usually between 15%
and 30% ─ are accepted otherwise, rejected.

Advantages
1. It simple to calculate
2. It is based on accounting information, which is readily available, and
familiar to businessman
3. It considers benefits over the entire life of the project.
Limitations
1. It is based upon accounting profit, not cash flow
2. It does not take into account the time value of money.

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