CHAPTER 4

PROJECT PREPARATION
4.1. INTRODUCTION
 Project preparation involves assessment of key aspects of a project
(pre-feasibility & feasibility studies).
 A feasibility study is the analysis of a problem to determine if it can
be solved effectively. This activity takes place during the project
initiation phase and is made before significant expenses are engaged.
 Major key dimensions of feasibility studies:
1. Commercial Dimension:
-Market & Demand Analysis
2. Technical Dimension comprising:
-Production Program and Plant Capacity
-Input (Raw Materials & Supplies) Study
-Location & Site Studies and Environmental Impact Assessment
-Engineering & Technology Study
4.2 THE COMMERCIAL DIMENSION :MARKET
AND DEMAND STUDY
• The primary task is to identify the need and estimate the
demand of the imagined product or service.
• Identify competitors and their characteristics in the target
market
• Determine socio-economic aspects relevant to the preparation
and evaluation of the project’s market strategy
• The first step in project analysis (in particular during
preparation) is to:
 Estimating the aggregate demand for the product proposed
to be manufactured (or service planned to be offered),
 Determining the market share that is likely to be captured.
4.2.1 PROJECTION OF MARKET DATA
 It is a final output of the market research and includes
 General characteristics of the economy
 Demand – desire and willingness to buy something.
 Current effective demand – the existing/true level of demand. 

 The basis for the estimation of current effective demand is the

actual consumption figure.
 A project’s sales may be substantially smaller than the demand in
the market depending on-the project’s capacity, marketing
strategy, and position (market share) in comparison with
competitors.
4.2.2 DEMAND FORECASTING TECHNIQUES
1. Qualitative Methods: depends essentially on the expert judgment
rather than numerical analysis to translate qualitative
information into quantitative estimates.
- Executives Opinion Method
- Delphi Method (experts opinion)

2. Time Series Projection Techniques: generate forecasts based on

an analysis of data over the historical time series.
- Trend Projection Method
- Moving Average Method

3. Causal Methods: seek to develop forecasts based on cause-effect

relationships specified in an explicit, quantitative manner.
- Consumption Level Method
- Regression Model
4.3 TECHNICAL DIMENSIONS
4.3.1 PRODUCTION PROGRAM AND PLANT CAPACITY
A.PRODUCTION PROGRAM
 A production program Concerned with determining the type/range
of products to be produced over the life of the imagined plant.
FACTORS TO BE CONSIDERED
I. Capacity Utilization
 Different stages of production should be considered.
 Different levels of production activities. Timing – initial,
intermediate, full scale.
 Initial
level of production may not be higher than 40 to 50%
(UNIDO) of the overall design capacity.
II. Production Problems
 Breakdown of machineries.
 Problem of line balancing (tasks not properly assigned to
series of workstations, or non-uniform cycle time between
workstations).
 Shortage of materials & utilities, available materials may
not be up to the standard.
III. Wastages and Spoilages
 Normal or abnormal wastages & spoilages may arise.
IV. Price vs. Quantity Sales
 Sales might be affected by the price established.
 The effects of higher selling prices may be reflected in terms
of lower sales volume/quantity.
 Lower sales volume affects the production program.
B. DETERMINATION OF PLANT CAPACITY
 “Plantcapacity” is the volume or number of units that can
be produced during a given period. It implies output
expectations from a production plant.

FACTORS AFFECTING CAPACITY DECISIONS

 Technological Requirements 
 Input Constraints (especially in developing countries)
 Investment Cost
 Resources of the Firm 
 Government Policy
4.3.2 MATERIALS AND INPUT STUDY
 In the materials and inputs study part of the feasibility study, the experts
assigned for the task have to:
 Identify the required types of inputs, their sources and brief
assessment of alternative types of inputs, and alternative sources of
supply;
 Describe general availability of Raw materials, Auxiliary materials,
Factory Supplies, and Utilities
 Summarize availability of critical inputs and possible strategies of
acquiring these inputs;
 Determine the procurement period of each imported input, if any.
 Outline costs related to procurement and storage of inputs (stores,
containers of required type; transport costs required e.g. forklifts etc.),
and
 Identify the number of personnel required for this function giving
due emphasis for quality of man power
4.3.3 LOCATION, SITE AND ENVIRONMENT
 A feasibility study should determine the location and site
suitable for an industrial project.
 This involves the identification and analysis of:
 Access to raw material;
 Access to market;
 Access to basic infrastructure like power, water,
communication;
 The implication on labor supply and issue of residence;
 Cultural considerations, etc.
 Once the location of the project is decided, alternative sites have
to be analyzed and the final selection made.
4.3.4 ENGINEERING AND TECNOLOGY
A. Selecting Appropriate Technology
 An integral part of engineering at the feasibility stage is
the selection of an appropriate technology, as well as
planning of the acquisition and absorption of this
technology and the corresponding know-how.
 The major issues addressed in the technological
analysis include:
 Brief review of the technology development history, focusing on the areas of change and the
implications of these changes on the competitiveness of a business organization in terms of
quality of product, cost leadership and other relevant areas of competitiveness;
 Identification of alternative technologies and alternative scales under use and their relative
merits and demerits in terms of the major areas that determine competitiveness of the
product and the business organization;
 Identification and analysis of the technology selection criteria and description of the
selected one.
B. Plant lay out
 After selection of technology, the next task is to prepare the
plant layout, drawings, basic design and engineering.
 These charts and drawings should adequately reflect the
interrelationship between environmental conditions and
constraints, socioeconomic infrastructure, technology flow,
constructions and material flow and inputs.
 The plant layout and basic engineering are prepared in
accordance with the selected technology and know-how.
C. Selection of Machinery and equipment
 The selection of machinery and equipment at the feasibility
study stage should broadly define the optimum group of
machinery and equipment necessary for a specific production
capacity by using a specific production technique.
D. Civil engineering
 The feasibility study should provide plans and estimates for the
civil works related to the project.
 This should cover site preparation and development, factory
and other buildings, civil engineering works relating to utilities,
transport, emissions and sewage discharge, internal roads,
fencing and security, and other facilities and requirements of the
plant.
 Civil engineering works are fairly project-specific and have to
be related to a particular plant site and the facilities that may be
required.
E. Maintenance and Replacement Requirements
 An important aspect of project engineering is the determination of
critical maintenance and replacement requirements for the project.
 Maintenance requirements should be assessed in terms of both the
maintenance equipment that may be necessary for efficient
maintenance of the plant and facilities, and the maintenance skills
and capability that need to be developed.
F. Estimates of Overall cost
 On the basis of the estimates from technology, machinery and
equipment and civil engineering works, the feasibility study
should provide an overall estimate of the capital costs of the
project.
 Such an estimate will undergo modifications in accordance with
the bids and offers received from suppliers and the contractors but
will nevertheless provide a fairly realistic estimate of capital
costs.
THE END