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PROJECT ANAYSIS AND PROJECT ANAYSIS AND PLANNINGPLANNING
ObjectivesObjectivesMain Objective: • To deepen participants’ knowledge and skills in the Analysis,
design & management of development projects.
Learning Outcomes:At the end of the course, participants will be able to:• Use the Logical Framework as a tool for project planning and
monitoring• Undertake stakeholder analysis• Undertake investment analysis • Undertake technical analysis of projects• Undertake environmental impact assessment
Achieving the Intended OutcomeAchieving the Intended Outcome• To achieve the learning outcomes, there will
be a combination of lectures, case studies and group discussions
• Class assignments are a very important component of the learning package
• The lectures provide the basic framework for the module and should be supplemented by further reading of the professional literature.
ReferencesReferences• Rory Burke: Project Management-Planning
and Control Techniques
• P. Belli, J.R. Anderson, H.N. Barnum, J.A. Dixon and Jee-Peng Tan, Economic Analysis of Investment Operations, First Published 2001, World Bank Institute, ISBN0821348507.
• D. Potts, Project Planning and Analysis for Development, First Published 2002, Lynne Reinner Publishers, ISBN1555876560.
What is a Project?What is a Project?• A project is any series of interrelated activities or
tasks that have to be accomplished within a specified time frame to achieve well defined objectives.
• Specific package of investments, policies, institutional reforms and other actions designed to designed to achieve a specific development objective or set of objectives within a designated period of time (W. B)
• A project can vary in size & complexity from a simple intervention like drilling a borehole, to a complex endeavour like design & production of a new aircraft.
Development projectsDevelopment projects
• A dev’t. project can be described as a specific task or set of activities designed to take place within a specified timeframe in order to improve the living standards or socio-economic life of a people.
• A development project may consist of investments in the following:– construction or civil works,– Provision of socio-economic services– Institutional strengthening
• Focus will be on social & construction projects
Characteristics of a ProjectCharacteristics of a Project
• Set of activities or tasks
• Has time-frame (defined start & end time)
• Has well defined objective (s)
• Has cost constraints
• Unique (may never be repeated the same way by the same group of people.)
Projects and OperationsProjects and Operations• Organizations perform work, which generally
involves operations or projects.• Operations & projects have similar
characteristics:– Performed by people,– Constrained by limited resources– Planned executed and controlled
• Although the two may overlap, the main difference is that operations are ongoing (permanent) & repetitive activities to deliver products & services, whilst projects are temporary and unique.
•
Projects and Operations Cont’d.Projects and Operations Cont’d.
• The temporary nature of projects stands in contrast with business as usual (or operations)
• Once a project is completed, it is either dissolve or turned into a normal on-going organization
Why Undertake Projects?Why Undertake Projects?
• To meet some development need or problem, such as lack of potable drinking water, deforestation etc.
• To take advantage of some opportunities.• To satisfy an interest.• Note: Projects can generate innovative, locally
adjusted solutions that can be up-scaled to accelerate development process.
What is Project PlanningWhat is Project Planning• Project planning is concerned with making rational
decisions or choices among alternative projects or interventions that would optimize the benefits to a society or group.
• It involves identifying priority needs & opportunities, setting clear objectives and the most appropriate interventions to accomplish those objectives as well as working out the human and material resources needed.
• The various stages of planning may be linked to the project cycle as captured in the next slide.
EVALUATION
FORMULATION(design)
IMPLEMENTATION(Scheduling, control, monitoring etc)
IDENTIFICATION (Conception)(Assessment of needs & opportunities)
The Traditional Project Cycle
APPRAISAL
Project Identification PhaseProject Identification Phase
• At this stage, an idea to address some problem or take advantage of some potential is identified.
• This idea is usually hatched through discussions with specialists and local community leaders
• Projects can be conceived based on the following:– Needs, such as basic materials and services to a
community that should be fulfilled– Market demand- domestic or overseas that should be
taken advantage of– Resource availability– Political consideration
Project Formulation (design)Project Formulation (design)
• At this stage, project objectives are defined and alternative solutions described.
• The alternative solutions are assessed to ascertain their feasibility in relation to technical, economic, social & environmental dimensions, & best options selected
• This requires collection and analysis of relevant data (information)
• For complex projects details feasibility studies are done, which may involve technical surveys, drawings, etc.
Project Cycle Contd.Project Cycle Contd.– Appraisal: For complex projects, or projects with high
investments, further feasibility studies are done. – This involves critical review & verification of all aspects of
the project to guarantee success. Usually done by third party (funding agency). May be followed by negotiations & approval of the Project
– Implementation: Executing the project to realize its objectives: preparing work plans; physical construction, procurement, recruitment, setting up institutions, managing people, monitoring activities.
An aspect of implementation is the project control, which seeks to keep the project on-track, on-time and within budget
Project cycle cont’d.Project cycle cont’d.
– Evaluation: Assessment of project effectiveness, efficiency, relevance and impact, so as to draw lessons to guide the way forward.
• Note: The breakdown and terminology of these phases differ, depending on type of project
PROJEC PLANNING-USING THE PROJEC PLANNING-USING THE LOGICAL FRAMEWORK APPROACHLOGICAL FRAMEWORK APPROACH
• The logical framework (Logframe) is an analytical tool used for the design, execution and evaluation of projects
• It derives its name from the Logical linkages set out by the planner(s) to connect a project’s means with its ends
• The key features of the project is summarized in a matrix highlighting the cause –effect logic or “If/Then” (If we supply farmers with improved seeds and assume there is adequate rainfall, then production will be increased.
Logical Framework MatrixLogical Framework Matrix
NARRATIVE SUMMARY
PERFORMANCE INDICATOR
MEANS OF VERIFICATION
ASSUMPTION
GOAL:
PURPOSE:
OUTPUT:
ACTIVITY: INPUTS
The Logical Framework Matrix Cont’d.The Logical Framework Matrix Cont’d.
• The Logical Framework Matrix provides answers to the following questions of a project: – WHY: a project is carried out– WHAT: the project is expected to achieve?– HOW: the project is going to achieve these
results?– WHICH: external factors are crucial for its success?– HOW: we can assess project success?– WHERE: we can find data required to assess its
success– WHAT: the project will cost
LogframeLogframeNARRATIVE SUMMARY
PERFORMANCE INDICATOR
MEANS OF VERIFICATION
ASSUMPTION
GOAL:Health Status of Rural Population Improved
PURPOSE:Health Services Expanded and Utilized by rural population
OUTPUT:1.Clinics Constructed
2. Primary Health Staff Trained and Posted
ACTIVITY:1.1 Locate site for the construction
1.2 Clearing of site
Logframe - GoalLogframe - Goal
• The Goal is the strategic or development objective, that the project combined with others will achieve
• This is the sector goal or broad objective to which the project contributes
• It is fairly broad in scope like ‘increased annual income of farmers’.
• It is usually stated in a positively achieved future condition.
Purpose or Immediate ObjectivePurpose or Immediate Objective• The Purpose is the result expected at the end of the
project execution period. • It is the change that the project will foster or what
would occur after producing & utilizing the outputs? • It is often the change in behaviour of project
beneficiaries or their response to the project. E.g what will farmers do differently if improved seeds are provide? This will be stated as: “Food production increased”
• The Purpose is rationale for the project & an important cause of the Goal.
• The title of the project should come directly from the statement of the Purpose
Project Purpose Cont’d.Project Purpose Cont’d.• The logical framework requires that each project
have only one Purpose, so as to ensure clarity • If there is more than one Purpose there is ambiguity,
and trade-offs can arise • Furthermore, experience shows that it is easier to
focus project outputs on a single Purpose since multiple Purposes diffuse project efforts & weaken the design
• In practice, however, the logframe of a complex programme may have different sub-projects each with a purpose and outputs
Project OutputsProject Outputs
• These are the specific products and services generated from the project activities
• These are the desired results generated from the project activities
• The outputs should bring about the project purpose • Examples of Outputs:
– “ Clinics Constructed”– “50 farmers acquired knowledge and skills in
improved farming methods” • Project implementers are held accountable for
achievement of project outputs.
OutputOutput Purpose Goal Purpose Goal
GOAL: Health Status of Rural Population Improved”
PURPOSE: Health Services Expanded and Utilized by Rural Population”
OUTPUTS:• Clinics Constructed
• Primary Health Care Staff Trained and Posted”
THE OBJECTIVE PYRAMIDTHE OBJECTIVE PYRAMID
INCREASED INCOME
IIMPROVED AGRICULTURAL
PRODUCTION
SEED CREDIT EXTENSION
The ActivitiesThe Activities
• The activities describe what the implementers will do or how they will carry out the project to achieve the outputs.
• Example: For the output – “50 Farmers trained in modern farming practices”,
• the activities will include:– Develop training materials– Conduct training– Evaluate training.
Performance IndicatorsPerformance Indicators• Indicators define in measurable detail the
performance levels or evidence that a goal, purpose or output is achieved.(How much, how well, timeframe etc.)
• Indicators tell us how to recognize successful accomplishment of results (outputs, purpose & goal)
• The basic principle of the column is ‘if you can measure it, you can manage it?’.
Means or Sources of VerificationMeans or Sources of Verification
• These describe the sources of information that will demonstrate what has been accomplished. They tell us:– Where to get the evidence that the objectives have
been met– Where we can find the data necessary to verify the
indicator • Important questions include:
– How available are the means of verification?– How reliable are the sources?– Is special data gathering required? If so what will it
cost?
Assumptions/RisksAssumptions/Risks• Assumptions are the external conditions that must exist if
the project is to succeed.• They are statements about the uncertain or risky factors
between each of the levels in the Hierarchy of Results. • They may describe important natural conditions, such as
– “25 millimeters of rain falls between May and October,” or factors such as
– “No labor strikes during start up of project,” – “Community transportation systems can handle weekly
shipments,” – “Timely release of budget,” – “Crop prices remain stable,” – “Farmers willing to try new methods, “etc.
Assumptions cont’d.Assumptions cont’d.
• Assumptions complete the if/then logic (describing the necessary conditions between each level) by adding the if/and/then logic (describing the necessary and sufficient conditions between each level).
• Determine the Assumptions by asking; what conditions must exist in addition to my Purpose (or Activities, Output, Purpose, Goal) in order to achieve the next level?
ExerciseExercise
• Indicate the cause and effect relationship with each set of statements by labeling them with ‘’1,2,3,4’’ beginning with ‘’1’’ as the first cause.
• ______ Increased small farmer income.• ______ Distribute the seeds.• ______ Standard of living in the rural areas raised
• ______ Potable water available to 60% of the villages in the southern region
• ______ Sickness due to water impurities decreased in the southern region
• ______ Choose the sites for the water purification systems.• ______ Water purification systems in operation.
____Recruit extension personnel.
• ______ Total cereals production increased.• ______ Extension program operational.• ______ Rice production increased.
4______ Design refresher course for health personnel.______ Health units meet medical needs of local
population.______ Rates of morbidity and mortality decreased.______ Medical skills of health personnel upgraded
Processes that precede LogframeProcesses that precede Logframe
• A Situational Analysis is carried out which comprises of:– Problem Analysis– Objective Analysis and – Stakeholder Analysis
Problem AnalysisProblem Analysis• Planners often use problem tree analysis technique
to identify all the problems surrounding a given problem and arranging these in a cause-effect relationship
• A problem tree approach can also be used to diagnose root-causes of various problem including organizational ones
• The problem analysis begins by identifying a core problem ( the trunk). The tree is then expanded upwards and downwards by continousily asking the following questions;– What is the cause of this problem?– What is th e effect of the problem?
• To enrich the discussions and analysis, it is desirable to identify major interest groups ( those affected or involved) in the project and involve them
• Capture the diverse perspectives as to the causes and effects of each identified problem
• Arrange the problems & their effects in logical cause –effect manner as shown in the next slide
Example of problem treeExample of problem tree
DecliningCoconut
Production
Coconut palms increasingly
affected by virus diseases
Farmers do not plant new coconuts
Farmers rarely apply plant protection measures
Traditional varieties
susceptible to virus
Farmers do not have access to more resistant
varieties
Farmers lack capital to buy
inputs
Farmers don’t know how to apply new varieties and
related inputs
Producer prices not attractive for
farmers
No localnurseries
Resistant varieties not available on
local markets
Mobility of extension
service severely restricted
Extension service
concentrates only on food
crops
Effective protection
measures very complex
Traditional protection rather
ineffective
Declining income of farmers
Declining national supply of fresh coconut
oil
No more exports of coconut products
Objective tree analysisObjective tree analysis
• The problem tree so constructed can be converted into an objective tree by rephrasing the problems into future desired states
• This is captured in the next slide
Example of objective treeExample of objective tree
IncreasedCoconut
Production
Reduced occurrence of
pests and diseases
Farmers increasingly plant new coconuts
Effective pest and disease
control system in place
Access to needed inputs
guaranteed
Farmers‘knowledge on improved coconut
cultivation practices enhanced
Government price policy favorable
for coconut production
Credit facilities for input
procurement by farmers
Import restrictions for
essential inputs removed
Capable extension staff
Effective extension
strategies for coconuts
Effective input supply system in
place
Increased income of farmers
Increased national supply of fresh
coconut oil
Exports of coconut products resumed
Sufficient capacities of
extension service
STAKEHOLDER ANALYSIS (SA)STAKEHOLDER ANALYSIS (SA)• Stakeholders are persons, groups or
institutions with interests in a project or programme.
• Primary stakeholders are those ultimately affected, either positively (beneficiaries) or negatively
• Secondary stakeholders are the intermediaries in the aid delivery process.
• This definition of stakeholders includes both winners and losers, and those involved or excluded from decision-making processes.
STAKEHOLDER ANALYSIS (SA)STAKEHOLDER ANALYSIS (SA)• This is the identification of key stakeholders of a
project and their interests and power differentials to influence the outcome of the project
• stakeholder analysis can:– draw out the interests of stakeholders in relation to
the problems which the project is seeking to address– identify conflicts of interests between stakeholders,
which will inform assessment of a project‘s– help to identify relations between stakeholders which
can be built upon, and may enable "coalitions" of project sponsorship, ownership and cooperation
– help to assess the appropriate type of participation by different stakeholders, at successive stages of the project cycle.
Stakeholder matrixStakeholder matrix
STAKEHOLDERS INTERESTS (expectations & fears)
Power or influence on Project 1) Primary
a) Beneficiaries
b) Negatively affected groups
c) Implementing agencies
2) Secondary
a) Policy makers
b) Donor
c)
Stakeholders Interests and Power Stakeholders Interests and Power Differentials.Differentials.
Keep Satisfied Engage Closely & Influence Actively
INTEREST HighLow
High
POWER
Monitor (Minimum effort)
Keep Informed
ASSIGNMENTASSIGNMENT
• Your situational analysis revealed that the rampant violent conflicts in districts X and Y are due to the following underlying causes, as shown in the next slide
Assignment cont’dAssignment cont’d
Rampant violent conflicts
Poor natural resource management
Poor democratic culture
Unfair benefit sharing
OverlappingLand
ownership
Weak Admin. system
Non-transparent
Electoral process
Political opponents as enemies
Assignment cont’d.Assignment cont’d.
• TASK:– Undertake further analysis development of the
problem tree on conflicts in the two districts and outline project proposal to address this problem. The proposal should capture the goal, intermediary objective (s), short term objectives and their indicators as well as the proposed activities.
– Summarize the proposal in a logframe.
Techniques in Project AnalysisTechniques in Project Analysis
• Various appraisal techniques are usually employed in project planning to decide on the merit of a project and to enhance its effectiveness, efficiency and sustainability
• The various dimensions of project analyse include: – Technical Analysis– Economic Analysis– Social Analysis– Environmental Impact Assessment
Technical Analysis of ProjectsTechnical Analysis of Projects• Technical Analysis involves two things:
i. Determination (measurement) of some technical parameters that are fundamental to effective project design & implementation e.g yield of crop or capacity of machinery. Based on these measurements, determine soundness of the project.
ii. Examination of the linkages and inter-relationship between various technical components of a project. E.g linkages between animal breed, feeding, health & housing.
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Why Undertake Technical Analysis? Why Undertake Technical Analysis?
• To establish project technical feasibility
• To provide a basis for making tentative choices among technological alternatives.
• To ensure that technical estimates or projections are realistic.
• To align technical design with project requirements or objectives (e.g meeting budgetary and socio-cultural requirements)
• To improve efficiency of operations.
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Why Technical Analysis (2)Why Technical Analysis (2)
• To provide a basis for monitoring project performance. E.g technical estimates and projections on crop yields can serve as indicators to monitor project performance
• To minimize risk by providing knowledge and visibility of some critical issues that would influence project viability. E.g some missing linkages made visible.
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ELEMENTS OF TECHNICAL ELEMENTS OF TECHNICAL ANALYSISANALYSIS
• Elements of technical analysis will vary from project to project.
• For example, an agricultural project will tend to focus on issues like soils, vegetation & climate, while an industrial project will focus on quality of machinery and equipments, costs, building plans and technology, etc.
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Elements of T.A ContinuedElements of T.A Continued
• However, there are common elements of technical analysis relevant to most projects. These are:
– Appropriateness of technology.
– Scale of operation,
– Location and layout of the project.
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Common Elements of T.ACommon Elements of T.A
i. Choosing the Right Technology
• Technological analysis is done by generating technological alternatives that are evaluated based on some critical factors or questions:
– Is the technology suitable for the realization of the specific objectives of the project?
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Elements of T.A Cont’d.Elements of T.A Cont’d.
– Is the technology feasible within the physical limitations of the site? For example, small power tillers may not be able to till heavy soils.
– Is the technology consistent with the general socio-economic conditions of the area?
– Is the cost of the technology within budget constraints?
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Elements of T.A Cont’dElements of T.A Cont’d
– Is there local capacity to operate and maintain the technology effectively? If not is it possible to build such capacity in the short run?
– Is the quality of machinery and equipment reflecting value for money?
– Is the technology environmentally sound?
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ii Scale of Operationii Scale of Operation• This is analysed with reference to the
following issues, among others:– Are there sufficient raw materials or other vital
inputs to justify the scale of operation?– Is the scale of operation consistent with the
technological choice?– Will the prevailing physical limitations allow for
the proposed scale of operation? – Is there market for the level of output?
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iii. iii. Location & layout of the projectLocation & layout of the project• Project location analysis may consider:
– Availability of raw materials– Access to labour– Transportation problems– Access to markets– Available government concessions for locating
projects in some places– Environmental & geo-physical constraints– Availability of basic infrastructure or utility
services
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Note:
• choice of project location will be determined by type of project. E.g a project for agro-forestry will consider different parameter than a pastoral project.
• The selection of site may involve a trade- off among various considerations like proximity to source of raw materials, market, infrastructure facility and access to labour.
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LayoutLayout
• For industrial projects, the lay out of the plant facilities is also critical so as to improve operational process (way of doing things) and cost efficiency.
• ( See Flow Chart on Technical Analysis)
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Analysis of Technical Feasibility.Analysis of Technical Feasibility.
• The following methods may be used:
i. Technical Surveys: Depending on the project, different types of surveys may be conducted to evaluate some parameters:
• Soils survey: to determine soil structure, nutrients and suitability.
• Topographic surveys: to design drainage system or for irrigation dev’t.
• Hydro-geological surveys to evaluate rock types & ground water.
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ii. Use of Historical Records: Historical records may be used to evaluate environmental factors, incidence of pests and diseases etc.
iii. Field Trails: This may be necessary to verify yields and other information. Some machinery or equipment may also be tried to ascertain their suitability.
iv. Field Interviews: Knowledge about the socio-cultural realities of people in the project area may be assessed through field interviews and direct observations
Investment AnalysisInvestment Analysis• Investment analysis is about choosing among
various investment options that are competing for our limited resources
• Projects require initial investments of scarce resources & the project will yield a stream of benefits over a period called the project life.
• A the same time, in order to sustain the benefits, a stream of costs called the operating costs will be generated.
• These project costs and benefits must be identified and valued (cost –benefit analysis), based on which the most beneficial project is selected from others
Investment Analysis Cont’d.Investment Analysis Cont’d.
• In Assessing the worth of a project or investments (be it public, private or business concerns) consideration is given to: – the size of the outflows and inflows of funds– the lifespan of the investment, – the degree of risks attached and – cost of obtaining funds.
Investment Analysis cont’d.Investment Analysis cont’d.
• Careful project analysis will point out unrealistic or questionable assumptions and indicate ways to modify the project so as to enhance the benefits
• A project carefully analysed has better chances of being implemented on time and yield the desired benefits
Financial Vrs Economic analysisFinancial Vrs Economic analysis• Projects can be appraised from the viewpoint of the
project’s beneficiary or loser ( financial analysis) or from the viewpoint of the whole society (economic analysis)
• Financial analysis seeks to answer the question: “Is the project financially profitable to a given individual, group or business?”
• Here costs & benefits are valued at market prices• Financial analysis is important to check if project is
financially sustainable whether cash flow will be sufficient to meet commitments
Financial Vrs Economic analysis Cont’dFinancial Vrs Economic analysis Cont’d
• Economic Analysis seeks to answer the question: “Is the project profitable to the society or the target population as a whole? What is its impact in areas like job creation & linkages with other sectors?”
• In Economic Analysis, costs and benefits are valued at shadow (efficiency or accounting) prices
Financial Vrs Economic analysis Cont’dFinancial Vrs Economic analysis Cont’d
• The main sources of the difference between financial and economic analysis are:
i. Market imperfections: market values are equivalent to social values only under conditions of perfect competition
ii. Externalities: A project may have benficial or detrimental external effects beyopund the project environment. E.g A road benefits not only the project target group but also neighboring area
iii.Taxes & Subsidies: In financial analysis, ( private point of view) taxes are costs and subsidies are finacial gains, but in economic naluysis ( social point of view), taxes and subsidies are only transfer payments, without any relevance to the projects outcome
Financial Vrs Economic analysis Cont’dFinancial Vrs Economic analysis Cont’d
iv. Concerns for savings: From the private point of vie (financial analysis) consumption & savings are treated equally, but in capital-scarce developing countries, the two should be valued differently (economic analysis)
v.Concern for Redistribution: Private firms are not concerned about the way their benefits are distributed across various groups in the society but this is important from the social point of view
Note: Initial section will focus on Financial Analysis
Investment Analysis cont’d.Investment Analysis cont’d.• The steps for investment decisions are:
i. Setting objectives that we wish to achieve by means of our investment
ii. Examining alternative means of achieving the set objectives
iii. Predicting the consequences of each alternative path to the desired objective
iv. Evaluation of alternatives
v. Selecting best alternative & making the expenditure (decision making)
vi. Monitoring Project(s)
Investment decision procedureInvestment decision procedureIndividual Company Public Entity
Objective Maximize annual profit
Profit & market expansion Increased capacity of Port
Alternative ways Stocks or Bonds or combination
-New trucks & warehouses - Expanded sales program-New product line
-New docking facilities with 7, 8 or 9 berths
Consequences of each Alternative
-12% pa. for bondStocks: Predicted with less accuracy
- How much cost & how much profit from each alternative
7, 8 or 9 berth will involve different costs & benefits
Evaluation of Alternatives
Compare NPV for each alternative
Compare cash flow NPV, IRR for each alternative
Compare Benefit: Cost Ratio for each alternative
Selecting or decision-making
Investment Appraisal MethodsInvestment Appraisal Methods
• Investment appraisal methods mainly focus on weighing project benefits against the costs, using financial and economic analyses.
• The various methods used to decide the merits of projects include:– Non-discounted methods like Payback period & Average
Rate of Return (ARR)
– Discounted cash flow methods like NPV, Benefit-Cost Ratio & IRR
Payback PeriodPayback Period• The pay-back method computes the time or
number of years it takes to recover the initial outlay from earnings generated by the investment.
• It can be determined from the formula: P=I/E, where: – P= the pay back period in years– I= Initial Investment– E= Annual after-tax earnings
• Example: If GH¢4000 is invest in a project with the aim of earning GH¢500 a year, the pay back is 4000÷500 = 8 years
• Decision criteria: Investments with shorter pay back periods more desirable.
Payback Period Cont’d.Payback Period Cont’d.• If however the project has uneven cash inflows, the
payback period will be determined by the cumulative cash flow over the duration of the project as indicated below:
Note: the payback period is 5 years
Year Cash Flow (Gh¢) Cumulative cash flow
0 (4000) (4000)
1 750 (3250)
2 750 (2500)
3 900 (1600)
4 1000 (600)
5 600 zero
6 400 400
Payback Period Cont’d.Payback Period Cont’d.
year Project1 Project 2 Project 3 Project 4 Project 5
0 (50) (100) (80) (100) (100)
1 5 50 40 40 30
2 10 30 20 30 30
3 15 20 20 20 10
4 20 10 20 10 10
5 20 20 5 20
6 10 20 10 40
Payback period (yrs)
Average Rate of Return (ARR)Average Rate of Return (ARR)• ARR expresses the profits or the average annual income
arising from a project, as a percentage of the initial capital cost
• It captures return on capital employed• ARR = (Average annual revenue/initial capital cost) x 100• Example: A project to replace a machinery is being appraised.
The machine will cost 240,000 and is expected to generate total revenues of 45,000 the projects five year life. What is the ARR of project?
Answer: ARR= (45,000/5)÷240,000 x100
= 9000 ÷ 24000 x 100 = 3.75%
Discounted Cash flow methods Discounted Cash flow methods
• Discounting is a technique that converts all benefits and costs into their value in the present.
• It is the process of finding the present worth of a future amount.
• The present worth is determined by multiplying the future amount by the expression 1/(1 + r)n , where:– r= interest rate and n= the year
• Generally, this expression is obtained in the form of DISCOUNT FACTOR from compounding and discounting tables.
Discounting cont’d.Discounting cont’d.• Discounting is based on the premise that a Cedi
received today is worth more than a cedi received in the future.
• This is based on the fact that any amount of money that is offered to be paid to you in future has lower worth than it's face value, mainly due to interest rate and inflation. Hence the need to discount
• Discounting is the opposite of compounding, which is the process of finding the future value of a present amount, growing at compound interest
Discounting Cont’d.Discounting Cont’d.
• The future value is determined by multiplying the present amount by the expression (1+r)n, where r= interest rate and n=year
• For example, if the interest rate is 10%, then GH¢100 placed in the bank today will be worth GH¢110 a year from now
• This means that if the interest rate is 10%, then GH¢110 to be received next year is worth only GH¢100 today.
Discounting Cont’d.Discounting Cont’d.
• If the interest rate is r, then the following formula can be used to find the present value (PV) of an amount (Pt) received at some time t in the future:
Discounting MethodsDiscounting Methods
• The most commonly discounted methods of measuring profitability of projects include:– Net Present Worth (Value)– The Benefit Cost Ratio– Internal Rate of Return
Net Present Value (NPV)Net Present Value (NPV)• Net present value of a project is the difference
between discounted benefits and discounted costs associated with a project.
• Net present value is the sum of discounted future cash flows to reflect their worth as of present day
• It is sum of the discounted benefits-discounted costs t=n
• NPV = Σ (Bt – Ct) / (1 + i)t t=0
where i = the discount factor t = time in years; Bt = Benefits in each
year Ct = Costs in each year• Note: present value for 0 years is always 1
Example of NPVExample of NPV
• Calculate the NPV of this project’s cash flows, using a discount rate of 10%
Year Cash Flow (GH¢) Discount Factor Present Value (GH¢)
0 (75,000) 1.000 (75,000)
1 10,000 0.909 9090
2 25,000 0.826 20,650
3 35,000 0.751 26,285
4 35,000 0.683 23,905
5 30,000 0.621 18,630
NPV Cont’d.NPV Cont’d.
• A positive NPV means the project is worthwhile, because the cost of tying up the investment in the project is compensated for by the resulting cash inflows
• If NPV>0 for a given discount rate, then project is acceptable, and not acceptable if NPV<0.
• If NPV =0, then project breaks even• When more than one project is being appraised,
choose the one that produces the highest NPV.
Benefit Cost RatioBenefit Cost Ratio• This is the ratio of Present Value of the Benefits to
the Present Worth of the Costs
• BCR=[Bt/(1+r)t] / [Ct/(1+r)t ]
• If B/C>1 for a given discount rate, then the project is acceptable and
• If B/C<1, then project not acceptable• If B/C=1, then Project breaks even• If more than I project, chose one with highest B/C• Example, calculate the CBR of the same project
that was used to calculate NPV (previous slide)
Calculation of BCRCalculation of BCR
• The BCR = PV of Benefit = 98560 = 1.31• PV of Cost 75,000
Year Initial cost
Discount factor
PV of Costs
Benefit DiscountFactor
PV of Benefit
0 75,000 1.000 75,000 -------- 1.000
1 0.909 10,000 0.909 9090
2 0.826 25,000 0.826 20,650
3 0.751 35,000 0.751 26,285
4 0.683 35,000 0.683 23,905
5 0.621 30,000 0.621 18,630
Present Value 75,000 Present Value 98,560
• Cost–benefit analysis is often used by governments and businesses, to evaluate the desirability of a given policy.
• It is an analysis of the expected balance of benefits and costs, including an account of foregone alternatives and the status quo, helping predict whether the benefits of a policy outweigh its costs, and by how much (i.e. one can rank alternate policies in terms of the ratio of costs and benefit).
Internal Rate of ReturnInternal Rate of Return
• The IRR is the discount rate, which reduces NPV to zero
t=n
IRR = Σ (Bt – Ct) / (1 + i)t = 0. t=0
• The project is acceptable if IRR opportunity cost of capital
• IRR answers the question: 'What level of interest will this project be able to withstand?’
• To compute IRR, guess the discount rate and compute the NPV.
• If the NPV is Positive, select a larger discount rate, If NPV is Negative, select smaller discount rate
• Recomputed NPV until value is zero • Or extrapolate by first using two discount rates that
will give a positive and negative NPV and extrapolate, using the formula:
• IRR = Discount rate with +ve NPV + Difference between the two discount rates x Positive NPV
• Range of +ve to -ve NPVs
Illustration of NPV and IRRIllustration of NPV and IRR• An initial investment of GH¢2 500 in a project produces cash inflows of
GH¢750, GH¢750, GH¢900, GH¢900 and GH¢595 at 12 month intervals. The cost of capital to finance the project is 12 %.
• You are required to decide whether the project is worthwhile using:• The Net Present Value • The Internal Rate of Return
Year 0 1 2 3 4 5
Cash flow (2500) 750 750 900 900 595
AnswerAnswer
Year Cash flow Discount factor @ 12% Present value
0 (2500) 1.000 (2500)
1 750 0.893 669.75
2 750 0.797 597.75
3 900 0.712 640.80
4 900 0.636 572.40
5 595 0.567 337.37
Net present value £318.07
1) Computing NPV
The NPV is positive which makes the project worthwhile
Answer Cont’d.Answer Cont’d.2) Computing for IRR• The above calculation for NPV used a 12% discount rate and
produced a positive value of GH¢318.07. • We need to find a discount rate that produces a negative
NPV. Let's try 20 %.
• The IRR lies between 12 % and 20 %. But we can get much closer to the precise answer by using arithmetic.
Year Cash flow Discount factor @ 20%
Present value
0 (2500) 1.000 (2500)
1 750 0.833 624.75
2 750 0.694 520.50
3 900 0.579 521.10
4 900 0.482 433.80
5 595 0.402 239.19
Net present value (£160.66)
Answer on computing IRR cont’dAnswer on computing IRR cont’d
• IRR = 12 % + Difference between the two discount rates x positive NPV NPV
range of +ve to -ve NPVs
• IRR = 12 % + (8 % * 318.07) 478.73
• IRR = 12 % + 5.32IRR = 17.32 %
Economic AnalysisEconomic Analysis• This is undertaken to ascertain the overall impact of
the project on a country's economy and wider society.
• In the financial analysis, which was the focus of the previous analyses, the emphasis is mainly on financial or monetary costs and benefits at the neglect of wider economic benefits or costs
• In economic and social analysis ( social cost benefit analysis) the project is examined using the whole country as the accounting entity with broader development objectives of the country.
•
Economic Analysis Cont.Economic Analysis Cont.
• Critical questions during economic and social analysis (social cost benefit analysis) the analysis include the following:– What are the direct economic benefits and costs
measured in terms of shadow (efficiency) prices & not market prices?
– What will be the impact of the project on the level of savings & investment in the society (country)?
– What would be the impact of the project on distribution of income?
Economic Analysis Cont.Economic Analysis Cont.
• In computing economic NPV and Economic Rate of Return (ERR) use the stream of financial costs and benefits and remove from them identifiable transfer payments such as taxes and direct subsidies
• Similarly, for the economic NPV the discount factor “i” will be the opportunity cost of capital for the economy, which is the Bank of Ghana prime rate, as against the interest rate of the project credit facility used for the financial appraisals.
Other Dimensions of Social Other Dimensions of Social AnalysisAnalysis
• A project will not be effective & sustainable if:– it is inconsistent with the socio-cultural realities
of the people– There is wide perception of injustice (may lead to
conflicts & instability)– Local people are not organized around the
project to continue with the project activities, or project linked to existing institutions to continue project activities after it ends
Social Analysis cont’d.Social Analysis cont’d.• The social analysis examines broader social implications of
proposed investments (project), including the following:– Extent project addresses felt needs of the people.– Sense of ownership & commitment to project by
beneficiaries– Level of support or acceptability of project objectives and
activities by wider community members– Sense of equity in sharing of project benefits– Employment opportunities and Income distribution– Effects of project on particular groups– Consistency of project with values & beliefs of community– What modification in the target groups’ behaviour pattern is
anticipated?
Environmental Impact Assessment (EIA)Environmental Impact Assessment (EIA)
• EIA is a process that ensures that environmental matters are taken into account early used early in the project planning process
• The EIA process identifies, predicts interprets & communicates information about impact of the project on biophysical environment (air, water, land, plants & animals)
• This is necessary because there is likely to be self destruction or system failure if the environmental impact of a project is so severe
• E.g if an agric project leads to severe degradation of the soil, then the soil will eventually fail to support the crops
Environmental Assessment Cont’dEnvironmental Assessment Cont’d
• A Sustainable Project should seek to enhance the natural resource base, but not to deplete or severely damage it
• Environmental Impact Assessment is often required to determine the possible environmental effects and any mitigation measures to take.
• Development projects such as dam, road, & power line construction bring about changes in the ecosystem in which they are undertaken. Such changes affect both the environment and well being of man, unless mitigation measures are taken
Environmental Assessment Cont’dEnvironmental Assessment Cont’d
• Key questions during Env’tal Assessment: i. What are the likely environmental impacts from
undertaking a project?ii. What is the cost of reducing the negative
impact?iii.Are there alternative ways of supplying the good
or service of project without incurring these environmental costs?
iv.What are the costs of these alternatives
PROJECT IMPLEMENTATION PROJECT IMPLEMENTATION TECHNIQUESTECHNIQUES
Key Activity Areas During project Implementation:• Establish an appropriate project organization.• Prepare and maintain a project workplan.• Mobilize project resources.• Manage staff.• Manage funds.• Manage materials and facilities.• Maintain facilities.• Monitor and evaluate progress.• Maintain Communications.• Review project relevance
Establish Appropriate Project OrganizationEstablish Appropriate Project Organization
• Responsibility for project implementation must be assigned to an appropriate organization.
• If one does not exist, then a new one must be designed and staffed.
• This may begin with the appointment of a project manager who may be charged with the task of designing the project organization structure, if non-exists
• In designing the project organization, we must relate the positions to the work that has to be accomplished.
• A useful technique or tool that can be used is the Work Breakdown Structure (WBS).
• Various forms of organization structures are designed to implement projects.
What is WBSWhat is WBS• The work breakdown structure is a technique for
breaking down a job (a project) into its component elements which can be displayed to show the relationship of the elements to each other and to the whole project
• It is a sub division of the project into smaller and manageable bits
• It seeks to break the project down into “work packages” which are assignable and for which accountability can be expected
WBS cont’d.WBS cont’d.• The WBS ensures that all the work required to
achieve the project objectives is included in the project plan
• It forms a logical organized base from which to:– establish cost accounts– define work packages– develop budgets– establish schedules– establish life cycle costs
• The WBS can be represented either in a graphical tree format (like an organizational chart) or in an indentured or textual format
HOUSEHOUSE
CIVILCIVILPLUMBINGPLUMBING ELECTRICALELECTRICAL
FOUNDATIONFOUNDATION WALLS/ROOFWALLS/ROOF PIPINGPIPING SEWERAGESEWERAGE WIRING APPLIANCES
FIGURE 1 House Project WBS Subdivided into Boxes
The Numbering or Coding SystemThe Numbering or Coding System -WBS -WBS
HOUSE1.0.0
CIVIL1.1.0
PLUMBING1.2.0
ELECTRICAL1.3.0
Foundations1.1.1
Walls/Roof1.1.2
Piping1.2.1
Wiring1.3.1
Fitting1.3.2
H/C Water
1.2.2
Various forms of organizationVarious forms of organization
• Various forms of organization structures are designed to implement projects. These are:
i. Project as part of a functional organization (Department-led)
ii. Matrix Structureiii. Separate project organizationiv. Project as a staff function.
Project as part of a functional Project as part of a functional organizationorganization
Finance Production Engineering Marketing
Project A Mechanical Electrical Civil Transport
MANAGING DIRECTOR
ADMINISTRATION ENGINEERING FINANCE OPERATIONS
Matrix StructureMatrix Structure
MD
PROJ ECT A PROJ ECT B
PROJECTS FINANCE PRODUCTION ENGINEERING
MANAGING DIRECTOR
Pure Project StructurePure Project Structure
PROJECT MANAGER
ADMINISTRATION OPERATION ENGINEERING FINANCE
MECHANICAL ELECTRICAL CIVIL TRANSPORT
Tips for effective organization of Tips for effective organization of workwork
• Once the structure has been agreed upon, job descriptions have to be prepared for the various positions.
• This will include responsibilities, limits of authority, how performance will be measured and personnel specifications.
• There is also the need to formulate and document administrative policies and operational procedures, which can guide both the project team and other staff.
• Terms of reference for all expatriate and external personnel, consultants and technical experts should also be prepared.
• After all these preparatory work the project team is then recruited with the active involvement of the Project manager
• The project manager must possess leadership qualities;
• He/she must be a facilitator giving equal attention to all critical areas of the project
• He/She must also have technical administrative, and political credibility.
Prepare and Maintain a Project WorkplanPrepare and Maintain a Project Workplan
• A workplan is a written statement, which describes in concrete terms the specific activities required to execute the project, the duration of each activity, who is responsible and the resources needed.
• Prior to preparing a detailed Workplan for implementation, it is, important to review project priorities to ascertain their relevance.
• This is necessary because usually, there is a long time span between project design and project implementation.
• During the time lapse, a lot of things may have changed on the ground to perhaps warrant a review of the project plan or design.
Steps in preparing workplanSteps in preparing workplan
i. Breakdown the project into its constituent activities.ii. Determine the duration of each activity.iii. Determine start and finish dates of each activity. iv. Assign responsibility v. Determine the resources required • Various advance techniques are used to prepare
detailed plans for implementation. These include Critical Path Method, Gantt or Bar Charts.
• Workplans have to be updated periodically depending on the progress of work.
• The work plan does the following: – Guides plan or project implementation– Serves as a means of control– Helps to do the right things in the right order
since we have to do many different things– Tells us when to start and finish each activity
and the project as a whole
A FORMAT OF A WORKPLANA FORMAT OF A WORKPLAN
Activity Action Step
Responsibility
Time Frame Resources Milestone /Intermediate Output
Remarks
1.
2.
3.
4.
5.
6.
7.
Start Finish
Gantt or bar ChartGantt or bar Chart• One of the most popular project planning techniques
for scheduling, reporting, and control of simple projects is the Gantt or bar chart.
• This technique graphically represents the progress of a project versus the time frame within which it must be completed
• They can be used as simple and easily understood models for communicating information to all levels or for project management & supervisors supervision.
• Gantt charts allow project managers to plan all activities, estimate the time necessary to complete each, the time required to complete overall project
Gantt Chart Cont’dGantt Chart Cont’d• To prepare a Gantt chart:
– List each of the discrete project activities or tasks that needs to be completed
– Establish the execution sequence of these activities– Estimate the duration of these activities (done in
collaboration with those responsible for completing the activities)
– List all activities in chronological order and determine those that can be carried out simultaneously & those that must be carried out sequentially.
Gantt Chart Project Example Gantt Chart Project Example
10/21 10/28 11/4 11/11 11/18 11/25 12/2
Dig basement
Pour footing
Lay block
Finish base work
Install main floor
Erect frame
Secure sheathing
Install roof boards
Install windows
Finish frames
Activity
Milestone
1 2 3 4 5 6 7Week
Task Bar
Milestone
Monitoring & Evaluation of ProjectsMonitoring & Evaluation of Projects
• Monitoring and evaluation are important components of project implementation
• There is usually need to design a monitoring and evaluation system to help track the implementation and performance of a project.
What is Monitoring? What is Monitoring? • Monitoring is the systematic and continuous
assessment or tracking of the progress of a piece of work or a project.
• It means constantly checking how things are going & comparing actual progress to what was planned.
• Within project context, monitoring is the tracking of resource acquisition & allocation, cost, production of goods & services, delivery of goods/services, and intermediate outcomes.
Why Monitor?Why Monitor?• Monitoring provides managers with information to:
– analyze current situation, – keep project activities on schedule, – track progress of a project towards set objectives– enhance accountability– draw lessons to guide decision making.
• The prime purpose of monitoring is to learn and adapt in order to maximize the value of the intervention.
• However, the monitoring information can feed into any external evaluation
Key Questions that Monitoring Key Questions that Monitoring Seeks to AddressSeeks to Address
• To what extent is the project execution consistent with the design or plan?
• To what extent are planned activities actually realized?
• Are we making progress toward achieving the set targets and objectives?
• What services are provided, to whom, when, how often, for how long, and in what context?
• How well are the services/ products provided?• What is the quality of the services/ products
provided?• What is the cost per unit service/ product?•
Domains of MonitoringDomains of Monitoring
• Inputs—Resources/ Investments going into conducting and carrying out the project or programme. These could include staff, finance, materials, and time.
• Process --- Project activities and how they are being carried out
• Outputs—Immediate visible, concrete and tangible results obtained through the execution of activities (e.g., number of water points, number of staff trained)
• Outcomes: Observable changes as a result of the outputs
What to monitor: What to monitor: 1. 1. Management/Administration
Information to be collected Sources of Information Use of InformationStaff/Personnel Issues
Performance Absenteeism Problems Expectations How staff Work as Team Whether Staffing Structures Work
Staff/Team Meetings Staff Reviews Supervision Informal Meetings Observation
Give Staff support and Feedback Training and Staff Development Improve Management Practices Modify/Clarify Job Descriptions
Vehicles Fuel Consumption Mileage Repairs New Parts Capital and Running Costs Performance
Log Book of Fuel and Mileage
Record Sheets of Repairs and Spare
Records of Money spent on each Vehicle
Meetings with Driver Observation
Decisions about replacing Old Vehicles when the become uneconomical to run
Compare different makes of Vehicle Check Mechanic’s Performance re:parts
fitted, frequency of repairs, etc. Identify problems, e.g. excessive fuel
consumption
Supplies Where to Obtain Supplies Cost from Different Supplies Stock levels Re-order Levels Items about to Run Out Time Needed to Supply
Suppliers, Catalogues Inventory of Stocks
Stock-keeping Record System
Obtain best value supplies Obtain supplies on time Maintain adequate stock levels
What to monitor cont’d.What to monitor cont’d.2. Finance2. Finance
Information to be Collected Sources of Information
Use of Information
project Budget and Expenditure
• Expenditure by budget headBalance of budget remaining this yearRegularly recurring items of expenditure,Previous year’s budget and expenditureRates of inflationExchange rates
Invoices & vouchers Budget break-down Analysis of budget
and expenditure, Newspapers, banks
Predict expenditure for budgeting Compare costs of different projects Identify areas of excessive expenditure Identify any savings Compare costs with project achievements
to assess cost- effectivenessStaff Salaries
Salaries Tax, insurance, etc. Annual increments Final pay Other payments: e.g. health allowance, staff
loans
Staff records Payslips Salary records
Ensure staff are paid according to pay scale reflecting nature of job and length of service
Ensure other payments are made according to correct procedures
Ensure all staff know what benefits they are entitled to
Cash Flow Analysis
When is cash needed for project? Where will cash come from? (might include
loan repayments, sales etc) What and when are cash outgoings? (regular
and irregular)
Cash record system To ensure sufficient but not excessive cash is available
What to monitor cont’d.What to monitor cont’d.3. 3. Project ActivitiesProject Activities
Information to be collected Sources of Information Use of Information
Results of Activities, Project Outputs
What has been done What has not been done but was
planned What problems have been uncounted How the problems have been
addressed How external situation has changed
Regular records of activities Supervision reports Meetings with staff, project
partners, and people affected by the work
Informal discussion Observation Surveys
Plan future work Identify project successes & opportunities Identify problems /weaknesses, & plan
strategy Review priorities Identify training needs Identify need for further information or
research, Project Inputs
What is needed, when & where to find it and at what cost
From suppliers, other organizations, etc.
Plan and schedule activities Monitor costs and budget
Progress of Project According to Objectives
Progress towards achieving objectives Are objectives still relevant?
Information about key indicators
Observation
Modify strategy and/or objectives if necessary
Feedback Identify need for further improvements
in monitoring systems
The Way project is managed how things are done (process)
How are decisions made? Are the people who are supposed to
be involved really involved? Do beneficiaries feel a sense of
ownership of the programme?
Indicators which show degree of participation
Meetings, discussions Observation
Show need to change management style Identify need to change methods to
encourage more participation Identify problems in relationship
between partners, people affected by the work , staff, etc and address them
Performance-Based MonitoringPerformance-Based Monitoring
• Traditional monitoring focuses on implementation issues (i.e., tracking of inputs, activities and outputs)
• performance–based monitoring goes beyond the tracking of inputs and outputs to the regular collection and analysis of actual results (i.e., outcomes and impacts).
What is Evaluation?What is Evaluation?
• In ordinary usage, evaluation is the process of determining the merit, worth, or value of a programme
• In a technical sense, evaluation is the process of making judgments about a project based on systematic data collection and analysis relative to specific issues of interest, like project relevance, effectiveness, efficiency etc.
Areas of Evaluation.Areas of Evaluation.
• Evaluation exercises often seek to collect & analyse data on the following:
i. Relevance: Are the programme objectives clear and appropriate? Are the activities the best way of achieving the objectives?
ii. Effectiveness: To what extent have the objectives been achieved or the progress being made towards achieving the programmme objectives
Areas of Evaluation Cont’d.Areas of Evaluation Cont’d.
iii. Efficiency: How well activities are being carried out. i.e cost effectiveness or value for money. For example is the organizational arrangement or the way activities are carried out conducive to efficient mode of operations?
iv. Results: What difference has the programme made in the life of the beneficiaries?
Areas of Evaluation Cont’d.Areas of Evaluation Cont’d.
v. Sustainability: Refers to the capacity of a project to continue the activities and deliver the intended benefits for a long time after the financing period.
• Sustainability analysis of a project may be examined under 5 dimensions: – Social– Economic– Environmental– Technical– Organizational capacity
