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Preparation of Project

Unit 8

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Meaning of project

Project is an approval for a capital investment to

develop facilities to provide goods and services.

(The World Bank) Project may be defined as a scientifically evolved

work plan devised to achieve a specific objective

with a specified period of time.

A project is a productive activity which can be

analysed, appraised and monitored independently.

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Characteristics of Project

1. Investment pattern

2. Benefits or gains

3. Time limit

4. Location

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Project classification - 1

Financial institutions in India classifyprojects according to their age and their

purpose1. New projects

2. Expansion projects

3. Modernisation projects4. Diversification projects

All these projects are generally profit oriented

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Project classification - 2

The services oriented projects can be

classified as

1. Welfare projects

2. Service projects

3. Research and development projects

4. Educational projects

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Project life cycle

Consists of 3 main stages

1. Pre investment phase

2. The construction phase

3. The normalisation phase

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Project management

A systematic approach to planning

and execution of the project

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Phases of project management

1. Identification

2. Formulation

3. Appraisal

4. Selection

5. Implementation6. Management

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Project Identification

Selection of a project after a careful

scanning of the environment ofinvestment opportunity and its likely

return

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Project Formulation

Translation of the idea into a concrete

project with its importantpreliminary aspects.

Preparation of feasibility reports

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Project Appraisal

Searching, scrutiny, analysis and

evaluation of market, technical andeconomic variables. Assessing the

profitability, ROI points

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Project Selection

Rational choice of a project in the

light of objectives and inherentconstraints

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Project Implementation

Expeditious completion of the project

within the allocated resources

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Project Management

Judicious operation of a project with

objectives like maximisation of netpresent value, maximisation of return

etc

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1. Project Identification

Is concerned with collection, compilation

and analysis of economic data for the

purpose of finding suitable opportunities forinvestment. (PESTLE)

Sources of project ideas include friends,

families, trade and professional journals,customers, intermediaries, research

institutes, competitors

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Criteria for selecting a particular

project Investment size

Location

Technology

Nature of industry

Demand

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Importance of project

identification Projects are catalyst for economic

development

Income generation and employmentpotential

Accelerate the process of social and cultural

development Spur development of infrastructure andenvironment

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2. Project Formulation

Is the process by which an entrepreneur

makes an objective and independent

assessment of the various aspects of aninvestment proposition of a project idea for

determining its total impact and also its

liability. An important stage of the pre investment

phase.

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Objectives of the project

This can be precisely defined at the start

of the formulation stage.

1. General objectivestates in broad termsthe achievements expected

2. Operational objectivesstates specific

results expected from the implementationof the project.

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Stages of Project Formulation

1. Feasibility analysis

2. Techno-economic analysis

3. Project design and Network analysis

4. Input analysis

5. Financial analysis

6. Social costBenefit analysis

7. Pre investment analysis

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Planning commissions Guidelines

for

project formulation/feasibility reportsfor Industrial projects

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1. General informationIndustry analysis

and company details

2. Preliminary analysis of Alternatives

demand and supply gap,

existing companies and their capacities,

proposed projects,

information on various options

considered, their locations, the

profitability, ROI,

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3. Project descriptionthetechnology/process chosen for the project,

the project location, details of plant andmachinery, operational requirements, theutility requirements, organisationalstructure, detailed activity wise

construction and implementation, riskfactors

4. Marketing plandemand and supply datafor market to be served, estimates ofprices, price sensitivity, past trend ofprices

5. Capital requirements and their costs

funds required

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6. Operating requirements and their costs

materials required after the

commencement of commercial production7. Financial analysisthe financial viability

of the project, includes pro forma financial

statements of Balance sheet, profit andloss, cash flow and fund flow for the

project period.

8. Economic analysissocial benefitanalysis, benefit to the community, the

impact on human resources in terms of

skills up gradation or skill obsolesence

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Project Design

It defines the individual activities which are part

of the project and their inter-relationship with each

other. It enables to identify the flow of event which must

take place for the successful implementation of the

project.

Network techniques help the management in

performing these functions efficiently and

effectively.

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Network analysis

Introduction

Network analysis is the general name given to certain

specific techniques which can be used for the planning,management and control of projects.

One definition of a project:

A project is a temporary endeavour undertaken to

create a "unique" product or service

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Network Techniques

CPM

PERT

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CPM / PERT

Project management techniques developed to meet

a need to plan, schedule and control complexdevelopment projects

Forms of network analysis in which the durationof processes required to complete a complex task

or project is used to aid informed decisions on thescheduling of these processes

Network analysis developed along two parallelpaths during the late 1950s

One Industrial (Critical Path Method)

One Military (Program Evaluation Review Technique)

The techniques, although not synonymous, areknown by any variation on the names: PERT,

CPM, or PERT/CPM

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History - CPM

CPM was developed by Du Pont and the emphasiswas on the trade-off between the cost of the project

and its overall completion time (e.g. for certain

activities it may be possible to decrease their

completion times by spending more money - howdoes this affect the overall completion time of the

project?)

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History - PERT

PERT was developed by the US Navy for the

planning and control of the Polaris missile

program and the emphasis was on completing theprogram in the shortest possible time. In addition

PERT had the ability to cope with uncertain

activity completion times (e.g. for a particular

activity the most likely completion time is 4weeks but it could be anywhere between 3 weeks

and 8 weeks).

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CPM - Critical Path Method

Definition: In CPMactivities are shown as anetwork of precedence relationships usingactivity-on-node network construction

Single estimate of activity timeDeterministic activity times

USED IN : Project Management - for the jobs ofrepetitive in nature where the activity time

estimates can be predicted with considerablecertainty due to the existence of past experience.

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Critical Path Method (CPM)

The first recognized formal use of a networkschedule methodology

CPM provides methodology for determining thecritical path of a network

Critical Path is the set of activities which determinesthe overall project duration

Analyzes the network time duration via activityduration

Utilizes the Forward and Backward pass method CPM can be applied for either ADM or PDM

Deterministic Method that used a fixed timeestimate (Most Likely) for each activity

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Critical Path Method (CPM)

Advantage

Easy to use and understand

Enables detailed planning and control by management Used for identifying critical activities

Disadvantage

Does not consider the time variations that can have

impact on completion of complex projects

Is not suitable for dynamic situations

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PERT -

Project Evaluation & Review Techniques

Definition: In PERTactivities are shown as a network ofprecedence relationships using activity-on-arrow networkconstruction

Multiple time estimates Probabilistic activity times

USED IN : Project management- for non-repetitivejobs (research and development work), where the timeand cost estimates tend to be quite uncertain. Thistechnique uses probabilistic time estimates.

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Program Evaluation and Review

Technique (PERT)

PERT is a statistical technique applied to anetwork schedule, which allows for therandomness in task completion times

Calculates the range of possible completion times and

probability of meeting deadlines Three time estimates are applied for each activity

Optimistic: Assumes tasks will go according to plan with fewproblems. Generally the shortest time in which a task can becompleted. Typically 3 standard deviations from the mean

1% chance of occurrence Most Likely: Based on experience of performing activity in

past. Completion time having the highest probability

Pessimistic: The longest time that a task might require.Assumes tasks will NOT go according to plan and requirerecovery actions. Typically 3 standard deviations from the

mean 1% chance of occurrence

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PERT (continued)

Advantages:

Has potential to reduce both the time an cost

required for a project

Provides Expected project completion time

Provides Probability of completion before a

specified date

Determines Critical Path

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PERT

Disadvantages

Time estimates are subjective

Estimates may be biased

Tasks never performed before are best guesses

Not simple for typical users to understand

Assumes a beta distribution for tome estimates

Actual distribution may be different

Assumes probability distribution of the projectcompletion time is the same as that of the critical path.

Results in under estimation of the project completion time dueto other paths becoming critical during life of project.

Monte Carlo simulations can be used to reduce this bias

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Project Report

Is a document incorporating relevant data inrespect of a project

Serves as a guide to management Gives details of the inputs and outputs of a

project

Records the merits and demerits inallocating resources to production ofspecific goods or services

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Need and significance of Project

Report Financial institutions and commercial

bankers need a project report to

appraise/evaluate the possibility of a loan. Does not contribute substantially to future

operations

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Scope of project report

1. Economic aspects

2. Technical aspects

3. Financial aspects

4. Production aspects

5. Managerial aspects

Contents of Project Report

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Contents of Project Report

1. Objective and scope of the report

2. Product characteristics3. Market situation and trends

4. Raw materials

5. Manufacturing details6. Plant and machineries

7. Land and building

8. Financial implications9. Marketing channels

10. Personnel/Organisational details

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Project Appraisal

Is an exercise undertaken by a financialinstitution

To make an independent and objectiveassessment of various aspects of aninvestment proposition

To arrive at the financing decision

To assess the viability of the project ondifferent aspects

Scope of Project Appraisal

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Scope of Project Appraisal

Choice of technology/production process

Size and scale of operations Locational aspects including availability of

infrastructure and resources

Plant and machinery selection includingsuppliers capabilities

Buildings and Plant layout

Project design and network analysis Effluent and by products

Project cost estimates, profitability

Sensitivity analysis

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Steps in Project Appraisal

Appraisal is a systematic process

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Step 1 Economic` Indicates priority use

Step 2 Technical Involves scale of the project

and the process adopted

Step 3 Organisational Suitability is examined

Step 4 Managerial Adequacy and competenceare critically scrutinised

Step 5 Operational Capability of the project

Step 6 Financial Determines the financial

viability for sound

implementation and efficient