UNIT - III
PROJECT MANAGEMENT
Dr. B. Srinivasa Rao
Associate Professor
DEPARTMENT OF MANAGEMENT STUDIES
UNIT-III OBJECTIVES
UNIT-III OUTCOMES
UNIT-III SYLLABUS
• Project Appraisal: Technical-Economic-
Financial-Legal and Social appraisal of the
Industrial Projects social cost-benefits-
sensitivity analysis.
UNIT-II CONTENTS
• Project Appraisal
• Technical
• Economic
• Financial
• Legal and Social
• social cost-benefits
• sensitivity analysis
Various activities involved in three
Phases of a Project are:
I. Pre-investment phase
a. Identification of investment opportunity
b. Preliminary Project analysis
c. Feasibility study
d. Decision making
II. Implementation phase
a. Project and Engineering Design
b. Negotiations and contracts
c. Construction
d. Training
e. Plant commissioning
III. Operational phase
Short-run Phase Long-run Phase
a. Uninterrupted operations of plant and a. Realisation or betterment of projections
machinery. with regard to sales, production, cost and
b. Development of Suitable norm of profit as estimated in the feasibility report.
productivity
c. Establishing good quality of the product
d. Securing acceptance of product
• Feasibility studies are made for each of the above
phase as they provide bases for investment
decisions on a project.
• Viability studies are made in order to make
appraisal of the project.
Note: 'Feasibility' is the study of the profitability, strengths, and
weaknesses of an existing business or proposed venture while
'viability' is the study of the existing or proposed business's
profitability.
Types of Appraisal Activities
• Market Appraisal
• Technical Appraisal
• Financial Appraisal
• Economic Appraisal
Market Appraisal
• Market Appraisal: It relates to find out the
aggregate demand for the proposed
product/service in future as well as the market
share the proposal under consideration.
• Market Feasibility: It is estimation of market size
for product/service and anticipated yearly
growth.
Note: In order to conduct the feasibility of a
project, one should have clear idea as to what data
is required for market analysis and the sources of
data.
Data Required for Market Analysis
• Demand of Previous and Present years
• Categories of product, consumers,
geographical area
• Price
• Distribution and sales promotion methods
• Consumer profile
• Govt policy
• Current source of supply and competitors
Sources of Data for Market Analysis
• Primary Data: ……………….
• Secondary Data: …………………….
• Market Survey: Census survey and Sample
survey.
Market Demand Forecasting
• The important techniques of demand
forecasting are:
Trend Projection method
Consumption level method
End use method
Leading indicator method
Econometric method
Trend Projection Method
• In consist of making future demand
projections by extrapolating the trend based
on the consumption trends in the previous
years.
Consumption Level Method
• This method forecasts the demand on the
basis of elasticity coefficient, the income
elasticity of demand, price elasticity of
demand.
End use method
• It is used to measure the demand for
intermediate products.
Leading indicator Method
• This method is used where the variables changing
faster.
• Those which change faster than others are known
as leading indicator, and the variables that
change slowly are called logging variables.
• The steps involved are to identify appropriate
leading indicators and establish the relationship
between leading indicators and variables to be
forecast.
Econometrics Method
• It is used to forecast the future behaviour of
the economic variables incorporated in the
model.
Technical Appraisal
• Technical appraisal determines the pre-requisites for the
successful commissioning of the project and the choice of
location, size and process. It covers:
a. Preliminary tests and studies – location and site selection.
b. Availability of inputs – materials and other inputs.
c. Optimal selection of scale of operations – plan capacity.
d. Production process – Production technology, product mix.
e. Equipment and machineries.
f. Pollution controls.
g. Factory layout – structures, civil works, charts, layout.
h. Work schedules.
i. Social aspects of technology
j. Alternative considerations
k. Interrelationships of key project factors.
• Preliminary tests and studies i.e., location and site selection:
Nearness to raw materials and markets
Infrastructure availability
Govt., policies
• Availability of inputs, i.e., materials and other inputs
(These are closely linked with the location, technology and the machine and equipment for the project)
The materials and other inputs can be classified in to:
a. Raw materials (Agricultural, Minerals, Forest, Livestock, Marine)
b.Processed industrial materials and components
c. Auxiliary materials
d.Utilities
• Optimal selection of scale of operations – plan
capacity.
• Production process – Production technology,
product mix
• Equipment and machineries.
• Pollution controls.
• Factory layout – structures, civil works, charts,
layout.
• Work schedules.
Financial Appraisal
• Financial Viability of the project must be
determined before a commitment for investment
on the project undertake.
• The term financial viability means that the
management has to ensure whether the return
expectations from the capital invested will be
sufficient enough to cover all costs including the
burden of serving debts, apart from earning
expected profits from the project.
Financial Appraisal
It involves the following activities:
a. Profitability measurement including cost of
capital, cost of project, profitability
projections etc.
b. Financial analysis including cash flows, means
of financing.
c. Financial evaluation by: Non-discounting
methods, discounting methods, Under
conditions of uncertainty.
a. Profitability measurement: It is judged by
making projections of production costs,
administration, selling and distribution costs
and sales revenue.
Total material cost – raw material, components,
consumables etc.
Total labour costs – Cost of all manpower.
Total utilities costs – cost of power, water, fuel etc.
Factory overheads – expenses on repairs, maintenance,
rent, taxes, insurance etc.
b. Financial analysis – the following financial
statements need to prepare for this purpose.
Projected Balance Sheet
Projected Sources and Application of Funds.
Projected Cash Flow Statement.
Projected working capital requirement and its
financing.
Financial Evaluation
• It can be done in three methods:
1. Non-discounting methods:
Payback period-low: The no of years required to recover the original cash outlay invested in a project.
Accounting Rate of return-high: Ratio of average profit per year to the total investment on the project.
Debt-service coverage ratio -2: It denotes the ability of a firm to repay its lo0ng-term debt out of its profit after tax but before
depreciation and interest.
2. Discounting methods:
Net Present value->=0 Accept; <0Reject: It consider two fundamental principals-Time value of Money and Cost of Capital; Then criteria for
accept and Reject.
Internal Rate of Return: Future earnings of project is equal to present investment. NPV=0; Accept if IRR>Cost of
capital; Reject if IRR < Cost of Capital. Two or more projects do not add is the limitation.2
Modified Internal Rate of Return: It assumes the earnings are reinvested hence, superior than IRR.
Benefit cost Ratio (OR) Profitability Index: Ratio of Present value of benefits to the present value of
investment. >=1 Accept; <1 Reject.
Discounting Payback period: it considers time value of money in calculation.
3. Under conditions of uncertainty: Reasons for uncertainty are inflation, technology change, wrong estimation of capacity, project life
etc.
Breakeven Analysis: identifies where the sales revenue is equal to cost of production and sales.
Sensitivity Analysis: It determines the effect of changes in the value of key variables – sales
volume, selling price, profitability of the project. Useful to determine any possibilities of input
substitution.
Risk Analysis – Project Specific risk; Competitive risk, Industry specific risk, Market risk, Internal
risk.
Risk Analysis:
a. Project Specific risk:
b. Competitive risk:
c. Industry specific risk:
d. Market risk:
e. Internal risk
There are varieties of techniques developed to handle risk in capital
budgeting:
1. Scenario Analysis
2. Hillier Model
3. Simulation Model
4. Decision tree analysis
Economic Appraisal
It is micro economic point of analysis.
It is a methodology of investment analysis for the social
point of view.
• Social cost-benefit analysis: The objectives are:
– Choice affecting employment, output etc.,
– Consumption, savings, foreign exchange earnings
– Distribution of income in the society.
• National parameters for economic apprisal:
– UNIDO approach -United Nations Industrial Development Organization.
– L-M approach – Little & Mirrless
– Indian approach – Decisions on public investment projects.
• Social aspects of technology
• Alternative considerations
ONE MARK QUESITONS
1. ,,,,,,,,,,,,, ------------------
2. ………….. -----------------------
CONCEPTUAL QUESTIONS - 2 MARKS
1. Project Appraisal
2. Technical of projects/Industrial projects
3. Economic of projects/Industrial projects
4. Financial of projects/Industrial projects
5. Legal of projects/Industrial projects
6. Social of projects/Industrial projects
7. social cost-benefits
8. sensitivity analysis
ESSAY QUESTIONS – 5 MARKS
1.
ESSAY QUESTIONS – 10 MARKS
1.
ASSIGNMENTS
and
Seminars based on Assignmenets
1.
CASE STUDY
1.
ASSIGNMENT
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ASSIGNMENT PRESENTATION MARKS
ROLL NO NAME TOPIC TOPIC/PROBLEM PROBLEM LITERATURE METHODOLOGY RESULTS CONCLUS REFEREN
IDENTIFICAITON DEFINITION REVIEW ION CES
ASSIGNMENT MARKS
REFERENCES
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THANK YOU
