Project Management- Santosh Parashar

8/14/2019 Project Management- Santosh Parashar

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santosh parasharsantosh parashar

Project ManagementProject Management


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Project Management:Project Management:A project is a means of moving from a problem to aA project is a means of moving from a problem to a

solution via a series of planned activities.solution via a series of planned activities.It has been defined variously by different authorsIt has been defined variously by different authors

and institutions.and institutions. It is very often a non-routine, non-repetitiveIt is very often a non-routine, non-repetitive

undertaking normally with discrete time and technicalundertaking normally with discrete time and technical

performance goals.performance goals.


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A project can be considered to be a series ofA project can be considered to be a series ofactivities and tasks that:-------activities and tasks that:-------

** Constitute a specific objective to beConstitute a specific objective to becompleted within certain specifications;completed within certain specifications;

* Involve defined start and end dates;* Involve defined start and end dates;

* Have funding limits and ;* Have funding limits and ;* Consume resources (money, time and* Consume resources (money, time and

equipments).equipments).


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A project has been defined by the projectA project has been defined by the project

management institute, USA asmanagement institute, USA as

any undertaking with a definite objectiveany undertaking with a definite objective

by which completion is identified.by which completion is identified.

In practice, most projects depends on finiteIn practice, most projects depends on finite

or limited resources by which theor limited resources by which the

objectives are to be accomplished.objectives are to be accomplished.


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The directory of management defines project as The directory of management defines project as

an investment project carried out according to a plan in order toan investment project carried out according to a plan in order to

achieve a definite objective within a certain time and which will ceaseachieve a definite objective within a certain time and which will cease

when the objective is achieved.when the objective is achieved.

On the basis of various definitions, aOn the basis of various definitions, a

project can be defined as aproject can be defined as ascheduled set of activities aimed atscheduled set of activities aimed at

the creation of a particular asset asthe creation of a particular asset as

per planned specifications, with aper planned specifications, with aview to generate wealth as estimatedview to generate wealth as estimated

for future years.for future years.


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Characteristics of a Project:Characteristics of a Project:

A project is undertaken by an owner who may be inA project is undertaken by an owner who may be inprivate sector (individual, partnership or aprivate sector (individual, partnership or acompany)/public sector ( government, joint).company)/public sector ( government, joint).

A project is a set objective to achieve.A project is a set objective to achieve.

An assigned team plans, manages and controls it.An assigned team plans, manages and controls it.

An outcome in response to environment.An outcome in response to environment. An undertaking involving future activities.An undertaking involving future activities.

Its implementation involves a coordination of works.Its implementation involves a coordination of works.

Constitutes activities to be carried out in the future.Constitutes activities to be carried out in the future.

Involves high skilled forecasting with sound basis for suchInvolves high skilled forecasting with sound basis for suchforecastingforecasting

Has a start and an end.Has a start and an end.


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Project ObjectivesProject Objectives

Project objectivesProject objectives are aimed at completing the project on time, withinare aimed at completing the project on time, within

the contemplated cost and at a profit to the company. Project may bethe contemplated cost and at a profit to the company. Project may be

undertaken withundertaken with

(i) Social(i) Social

(ii) Economic(ii) Economic(iii) emergency objectives.(iii) emergency objectives.


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Social objective:Social objective: The social project objectives are inThe social project objectives are in

conformity with social cost benefit aspects of individual projects.conformity with social cost benefit aspects of individual projects.Social objectives is the process of evaluating a project from theSocial objectives is the process of evaluating a project from thepoint of view of the total impact which the project will have onpoint of view of the total impact which the project will have onthe economy of the nation.the economy of the nation.

Economic objective:Economic objective: The economic objectives of theThe economic objectives of theproject are always profit oriented. It is primarily concerned withproject are always profit oriented. It is primarily concerned with

primary financial costs and benefits of the project. It quantifiesprimary financial costs and benefits of the project. It quantifiesthe resources which the project will consume in the shape ofthe resources which the project will consume in the shape ofcapital and maintenance expenditure.capital and maintenance expenditure.

Emergency objective:Emergency objective: Projects are also undertakenProjects are also undertakenon account of emergency and need of national importance; e.g.on account of emergency and need of national importance; e.g.defense and security. Such projects can be highly complex anddefense and security. Such projects can be highly complex and

costly. They are non-industrial and usually funded by thecostly. They are non-industrial and usually funded by thegovernment .government .


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Classification of Project:Classification of Project: Quantifiable and Non- quantifiable projects:Quantifiable and Non- quantifiable projects:

Quantifiable projects are those in which quantitativeQuantifiable projects are those in which quantitative

assessment of benefits can be made.The projects forassessment of benefits can be made.The projects forindustrial development, power generation etc. come underindustrial development, power generation etc. come underthis category.this category.

Non-quantifiable projects are those in which the benefitsNon-quantifiable projects are those in which the benefitscan not be measured quantitatively. The projects involvingcan not be measured quantitatively. The projects involvinghealth, education, defense etc. fall under this category.health, education, defense etc. fall under this category.

Projects of different sectors:Projects of different sectors: Projects can be classified according to the sector to whichProjects can be classified according to the sector to which

the project owner belongs. They are projects: (i) for thethe project owner belongs. They are projects: (i) for thepublic sector (ii) for the private sectorpublic sector (ii) for the private sector

(iii) in the joint sector.(iii) in the joint sector.


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Industrial and non industrial projectsIndustrial and non industrial projects:: Industrial and non industrial projects are those projects belonging toIndustrial and non industrial projects are those projects belonging to

organizations with commercial objectives. They always aim at makingorganizations with commercial objectives. They always aim at makingprofits. Whereas non-industrial projects are those projects undertakenprofits. Whereas non-industrial projects are those projects undertakenwithout monetary mission and primarily with social objective such aswithout monetary mission and primarily with social objective such ashealthcare, public education and irrigation.healthcare, public education and irrigation.

Projects belonging to core sectorProjects belonging to core sector:: There are complex mega projects undertaken by the governmentThere are complex mega projects undertaken by the government

which, in turn, help generate commercial activities. Many industrialwhich, in turn, help generate commercial activities. Many industrialprojects, namely, power projects, port facilities, highways, mining andprojects, namely, power projects, port facilities, highways, mining andsteel include in this.steel include in this.

Need-based projects:Need-based projects: Some projects grow out of needs or opportunities. Accordingly, thereSome projects grow out of needs or opportunities. Accordingly, there

are different types of needs leading to different types of projects suchare different types of needs leading to different types of projects suchas balancing, modernization, replacement, expansion, diversification,as balancing, modernization, replacement, expansion, diversification,rehabilitation and reconstruction projects.rehabilitation and reconstruction projects.

P j t lif lP j t lif l


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Project life cycle:Project life cycle:

The project has to pass through three differentThe project has to pass through three different

stages such as stages such as

(i) Pre-investment phase(i) Pre-investment phase

(ii) Construction Phase(ii) Construction Phase

(iii) Normalization Phase.(iii) Normalization Phase.

Pre-investment phase:Pre-investment phase: It is primarily concerned with setting of aims and objectives,It is primarily concerned with setting of aims and objectives,

forecasting of demand, selection of optimal strategy, evaluation offorecasting of demand, selection of optimal strategy, evaluation ofinput characteristics, projections of the financial profile, cost input characteristics, projections of the financial profile, cost benefit analysis and ultimately pre-investment appraisal.benefit analysis and ultimately pre-investment appraisal.

This is the stage at which the project idea is converted into aThis is the stage at which the project idea is converted into aconcrete investment proposal. At this phase, no much resourcesconcrete investment proposal. At this phase, no much resourcesare consumed. Some amount of expenditure has to be incurred inare consumed. Some amount of expenditure has to be incurred inthe form of conducting surveys, consultancy and other intangiblethe form of conducting surveys, consultancy and other intangibleexpenses including registration fees, cost of license etc.expenses including registration fees, cost of license etc.


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Construction Phase:Construction Phase: Once the investment decision has been taken, the next phase isOnce the investment decision has been taken, the next phase is

the construction phase.the construction phase.

Investments are made in building the basic assets of the projectInvestments are made in building the basic assets of the projectduring this phase. Tduring this phase. T

he assets may be in the form of land and buildings, plant andhe assets may be in the form of land and buildings, plant andmachinery, ancillary accommodation, communication services,machinery, ancillary accommodation, communication services,control systems and marketing organizations. Thus, this phasecontrol systems and marketing organizations. Thus, this phaseconsists mainly of developing the infrastructure for the project.consists mainly of developing the infrastructure for the project.

Normalization phase:Normalization phase: This phase begins after the trial run of the project frameworkThis phase begins after the trial run of the project framework

developed during the construction phase.developed during the construction phase. Its primary objective is to produce the goods and services forIts primary objective is to produce the goods and services for

which the project was established.which the project was established. At this stage, the expenditure has to be incurred on raw materials,At this stage, the expenditure has to be incurred on raw materials,

fuel, utilities, administration etc. These expenses are of recurringfuel, utilities, administration etc. These expenses are of recurringnature. During this phase, the assets created during thenature. During this phase, the assets created during theconstruction period are utilized.construction period are utilized.


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Project ManagementProject Management

Project Management is the application ofProject Management is the application ofknowledge, skills, tools and techniques of theknowledge, skills, tools and techniques of theproject activities to meet the projectproject activities to meet the projectrequirements. It involves the following steps:requirements. It involves the following steps:

Project IdentificationProject Identification Project formulationProject formulation Preparation of project reportPreparation of project report Project appraisalProject appraisal

Project implementationProject implementation


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Project IdentificationProject Identification

It refers to the finding out of a business or environment opportunity.It refers to the finding out of a business or environment opportunity. It involves collection, compilation and analysis of economic data for theIt involves collection, compilation and analysis of economic data for the

purpose of locating the possible opportunities for investment.purpose of locating the possible opportunities for investment. It has already been noted that a project is conceived out of problemsIt has already been noted that a project is conceived out of problems

and/or opportunities.and/or opportunities. It is of great importance that the under consideration by an organizationIt is of great importance that the under consideration by an organization

must fit in the overall environment.must fit in the overall environment. It is necessary that the owner of the project should critically overviewIt is necessary that the owner of the project should critically overview

the parameters within which the project is to be implemented. Thesethe parameters within which the project is to be implemented. Theseparameters include: -parameters include: -


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Industrial policy framework.Industrial policy framework. The owner has to examine the government policy which encouragesThe owner has to examine the government policy which encourages

industry as a whole. In this connection, he should examine the industrialindustry as a whole. In this connection, he should examine the industrialpolicy of 1991 regarding industrial license, foreign investments, foreignpolicy of 1991 regarding industrial license, foreign investments, foreigntechnology agreements, and public sector policy.technology agreements, and public sector policy.

Major enactments relevant to industry:Major enactments relevant to industry: There are several major enactments made by the government to achieveThere are several major enactments made by the government to achieve

the objectives of socio-economic goals and its industrial policy. Theythe objectives of socio-economic goals and its industrial policy. Theyinclude the factories Act, the MRTP, the Industrial Development andinclude the factories Act, the MRTP, the Industrial Development andRegulation Act and the Pollution Control Act.Regulation Act and the Pollution Control Act.

Incentives for industries:Incentives for industries: There are various incentives introduced by the government with theThere are various incentives introduced by the government with the

objective of rapid industrial growth as well as decentralization. Suchobjective of rapid industrial growth as well as decentralization. Suchincentives include encouragement of export-oriented units, allowingincentives include encouragement of export-oriented units, allowingindirect taxes paid on raw materials to be claimed back, encouragingindirect taxes paid on raw materials to be claimed back, encouragingindustries in backward areas to remove regional imbalance, permittingindustries in backward areas to remove regional imbalance, permittingincentives for small-scale units etc.incentives for small-scale units etc.

Industrial climate:Industrial climate: The promoter has to look around for the possible opportunities prevalentThe promoter has to look around for the possible opportunities prevalent

in the overall industrial climate. The governments policy with regard toin the overall industrial climate. The governments policy with regard to

various restrictions and relieves plays an important role in thevarious restrictions and relieves plays an important role in thedevelopment and growth of the industry. One of the most importantdevelopment and growth of the industry. One of the most importantencouragements for industries is the relief offered from taxation- bothencouragements for industries is the relief offered from taxation- bothdirect and indirectdirect and indirect


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Project Formulation:Project Formulation: A project grows out of problems or opportunities Therefore, the need for aA project grows out of problems or opportunities Therefore, the need for a

project. In the complexities of business world, it is almost impossible for anproject. In the complexities of business world, it is almost impossible for anorganization to start investing in a business before drawing a plan for theorganization to start investing in a business before drawing a plan for theproposed investment.proposed investment.

Project formulation is a systematic expression of such a plan with detailedProject formulation is a systematic expression of such a plan with detailedestimates within certain parameters .Such estimates, in order to be moreestimates within certain parameters .Such estimates, in order to be morerealistic and reliable, are based on actual experiences, environments alongrealistic and reliable, are based on actual experiences, environments alongwith the trends forecasted for the coming years. It involves a step by stepwith the trends forecasted for the coming years. It involves a step by stepinvestigation and development of project idea.investigation and development of project idea.

It is a process involving joint efforts of a team of experts. The project teamIt is a process involving joint efforts of a team of experts. The project teamshould consist of experts in major substantive fields of the project.should consist of experts in major substantive fields of the project.

Depending on the situation, any large project should comprise the followingDepending on the situation, any large project should comprise the followingteam members:*One industrial economist*One market analyst*One or moreteam members:*One industrial economist*One market analyst*One or moretechnologist (s)/ engineer(s) specialized in the appropriate industry*Onetechnologist (s)/ engineer(s) specialized in the appropriate industry*Onemechanical or industrial engineering*One civil engineer, if needed*Onemechanical or industrial engineering*One civil engineer, if needed*Onemanagement accounting expert.management accounting expert.

A well- formulated project will help obtain the required assistance fromA well- formulated project will help obtain the required assistance fromfinancial institutions. It will also help get the necessary governmentfinancial institutions. It will also help get the necessary government

clearances.clearances. Once the project has been identified, necessary steps are taken to exploreOnce the project has been identified, necessary steps are taken to explore

and assess the viability of it. It involves a study in one or more or all theand assess the viability of it. It involves a study in one or more or all thefollowing areas: Feasibility analysis, Technical analysis, Economical analysis,following areas: Feasibility analysis, Technical analysis, Economical analysis,Financial analysis, Social cost-benefit analysis.Financial analysis, Social cost-benefit analysis.


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Preparation of project report:Preparation of project report:

Having gathered all details from feasibility studies, the next step is theHaving gathered all details from feasibility studies, the next step is thepreparation of project report.preparation of project report.

A project or a feasibility report is a written account which provides all theA project or a feasibility report is a written account which provides all thedetails about the unit proposed to be set up for the manufacture of adetails about the unit proposed to be set up for the manufacture of a

product or rendering a service. It includes the technical, financial,product or rendering a service. It includes the technical, financial,commercial and social viabilities of the proposed project.commercial and social viabilities of the proposed project. The project report enables the entrepreneur to know whether it would beThe project report enables the entrepreneur to know whether it would be

physically possible, financially viable, commercially profitable and sociallyphysically possible, financially viable, commercially profitable and sociallydesirable to do the business. Banks and financial institutions also requiredesirable to do the business. Banks and financial institutions also requireproject report for providing financial assistance.project report for providing financial assistance.

Various development agencies also require detailed project report to helpVarious development agencies also require detailed project report to helpsetting up of the business. The project report contains informationsetting up of the business. The project report contains informationregarding economic, technical, financial, managerial and productionregarding economic, technical, financial, managerial and productionaspects of the project.aspects of the project.


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Objectives of Preparing Project Report:Objectives of Preparing Project Report:

The preparation of a project report serves the following three objectives:The preparation of a project report serves the following three objectives:

1.1. Facilitate planning of business by setting guidelines for future action.Facilitate planning of business by setting guidelines for future action.

2.2. Help procure finance from various financial institutions and banksHelp procure finance from various financial institutions and banks

which ask for such detailed information before giving any assistance.which ask for such detailed information before giving any assistance.3.3. Provide a framework for the presentation of information regardingProvide a framework for the presentation of information regarding

business required by the government for granting licenses etc.business required by the government for granting licenses etc.

To achieve the above objectives, the following should be ensured:To achieve the above objectives, the following should be ensured:

1.1. The project report is with sufficient details to indicate the possible fateThe project report is with sufficient details to indicate the possible fate

of the project when implemented.of the project when implemented.2.2. The project report meets the questions raised during the appraisal. ForThe project report meets the questions raised during the appraisal. For

Example, the various types of analysis-financial, economic, technical orExample, the various types of analysis-financial, economic, technical orsocial etc.-should be taken care of in the project reportsocial etc.-should be taken care of in the project report


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Technology and design aspects.Technology and design aspects.

The project report should deal with technology and design which have already beenThe project report should deal with technology and design which have already beentested, thus minimizing the technical risk. In order to minimize the technicaltested, thus minimizing the technical risk. In order to minimize the technicaluncertainties, it would be advisable to include the findings or reports of the specialists.uncertainties, it would be advisable to include the findings or reports of the specialists.

Economic aspects:Economic aspects:

The project report should emphasize the economic aspects of the project whichThe project report should emphasize the economic aspects of the project whichincludes:includes:

* the location of the plant and the benefit for such location including the available* the location of the plant and the benefit for such location including the availableinfrastructure facilities;infrastructure facilities;

* the volume of the project, the capacity installed; and* the volume of the project, the capacity installed; and

* the availability of the resources and the utilization of such resources in a* the availability of the resources and the utilization of such resources in acomparatively beneficial manner, e.g. the internal rate of return projected as comparedcomparatively beneficial manner, e.g. the internal rate of return projected as compared

to the possible rate of return on investment from the market without inherent risk..to the possible rate of return on investment from the market without inherent risk..

Social and political aspects.Social and political aspects.

The public attitude towards a project is becoming increasingly important. TheThe public attitude towards a project is becoming increasingly important. Thedisplacement of people and the concerned attitude towards implementation of a projectdisplacement of people and the concerned attitude towards implementation of a projectcan be very serious problems. Environmental pollution, ecological balance, and potentialcan be very serious problems. Environmental pollution, ecological balance, and potentialemployment are all important considerations in the preparation of project reports.employment are all important considerations in the preparation of project reports.

Politics is an important aspect in the implementation of a project. So, the project reportPolitics is an important aspect in the implementation of a project. So, the project reportshould recognize this risky game since its implementation is dominated by politicalshould recognize this risky game since its implementation is dominated by politicalconsiderations.considerations.


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Financial aspects.Financial aspects.

The prime importance of a project is the assurance of the timely availability of funds orThe prime importance of a project is the assurance of the timely availability of funds orresources. The availability of funds is to be ensured throughout, i.e. during theresources. The availability of funds is to be ensured throughout, i.e. during theimplementation period as well as when it is supposed to start generating income/benefit.implementation period as well as when it is supposed to start generating income/benefit.The following are the valid questions to be answered by the project report:The following are the valid questions to be answered by the project report:

1. Whether the generation of income or benefit will be sufficient for the servicing of the1. Whether the generation of income or benefit will be sufficient for the servicing of theborrowed funds, i.e. payment of interest and repayment of principal, and also the expectedborrowed funds, i.e. payment of interest and repayment of principal, and also the expectedincome from the owners capital invested in the project.income from the owners capital invested in the project.

2. Whether such returns on investment are adequate and, also, in excess of other possible2. Whether such returns on investment are adequate and, also, in excess of other possibleincomes from such funds without taking the risk.incomes from such funds without taking the risk.

The report also provides the Break even point level of workings.The report also provides the Break even point level of workings.


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Contents of a Detailed Project report:Contents of a Detailed Project report:A detailed project report should contain the following information:A detailed project report should contain the following information:

1. Back ground or general information1. Back ground or general information. The project should contain the following general. The project should contain the following generalinformation about the project:information about the project:

(a) Organization. It includes the type of organization, bio-data of promoters etc.(a) Organization. It includes the type of organization, bio-data of promoters etc.

(b) Details about the product to be manufactured should be given(b) Details about the product to be manufactured should be given

(c) Technical Know-how. The source of technical know-how along with the supply of major plant(c) Technical Know-how. The source of technical know-how along with the supply of major plantand machinery, training of personnel etc. should be detailedand machinery, training of personnel etc. should be detailed

2. Project at a Glance .2. Project at a Glance .A summary of the product, capacity, production, sales. Project cost andA summary of the product, capacity, production, sales. Project cost andsources of finance are to be shown.sources of finance are to be shown.

3. Report on the Market research on the product:3. Report on the Market research on the product: Details of the market research on the productDetails of the market research on the productshould be given. It should contain :should be given. It should contain :

(a) the expected volume of the market and its growth(a) the expected volume of the market and its growth

(b) the expected volume of the marketshare(b) the expected volume of the marketshare

(c) the possible market channels(c) the possible market channels

(d) the dealers expectation about the commission, discount etc.(d) the dealers expectation about the commission, discount etc.

(e) the credit period to be extended to the dealers(e) the credit period to be extended to the dealers

(f) the requirement of service after sales; and(f) the requirement of service after sales; and(g) the competitors, their strength and weakness and their market share.(g) the competitors, their strength and weakness and their market share.

4. Technical details4. Technical details . These include details about the (i) Product (ii) Manufacturing process and. These include details about the (i) Product (ii) Manufacturing process and

(iii)Plant layout.(iii)Plant layout.

5. Plant and Machinery:5. Plant and Machinery: The plant and machinery required for the project should be detailed.The plant and machinery required for the project should be detailed.


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66.. Project Schedule:Project Schedule: The project report should have complete details of the estimated timeThe project report should have complete details of the estimated timeschedule for the implementation of the project from the start till the final trail run, i.e. justschedule for the implementation of the project from the start till the final trail run, i.e. justbefore the start of the commercial production.before the start of the commercial production.

The project schedule is a tool to ensure timely implementation of the project and an aid toThe project schedule is a tool to ensure timely implementation of the project and an aid toachieve the project objectives of time, cost and quality. The delay in any step may lead toachieve the project objectives of time, cost and quality. The delay in any step may lead tofurther delay of the subsequent steps.further delay of the subsequent steps.

OrganizationOrganization The organization structure should also be included in the project report. TheThe organization structure should also be included in the project report. Themanpower requirements at different levels- managerial, skilled and unskilled- should bemanpower requirements at different levels- managerial, skilled and unskilled- should beshown. Pay scales for different grades should be ascertained.shown. Pay scales for different grades should be ascertained.

Project Cost and Source of FinanceProject Cost and Source of Finance The project report should include estimatedThe project report should include estimatedexpenditure under the following various heads:expenditure under the following various heads:

Land and site developmentLand and site development

Building and supporting activitiesBuilding and supporting activities

Plant and MachineryPlant and Machinery

Know-how feesKnow-how fees

Preliminary and pre operative expensesPreliminary and pre operative expenses

ContingenciesContingencies

Interest and commitment chargesInterest and commitment charges

Margin MoneyMargin Money

Cost of Production:Cost of Production: The detailed project report deals with the financial estimates of theThe detailed project report deals with the financial estimates of theproject operation for five to eight years from the start of the commercial productionproject operation for five to eight years from the start of the commercial production

Working capital requirements :Working capital requirements : The detailed calculation of the working capital required byThe detailed calculation of the working capital required bythe project to carry out its operations should be shown in a project report.the project to carry out its operations should be shown in a project report.

Debt Service Coverage Ratio:Debt Service Coverage Ratio: The project report also shows the capability of the project tThe project report also shows the capability of the project tserve the borrowings for its implementation. The project owners and the financial institutionserve the borrowings for its implementation. The project owners and the financial institutionlending the fund towards the implementation of the project may like to appraise and findlending the fund towards the implementation of the project may like to appraise and findout whether the project can generate sufficient revenue to repay the loan together with theout whether the project can generate sufficient revenue to repay the loan together with theinterest due on such loan.interest due on such loan.


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Project Appraisal:Project Appraisal: Project appraisal is the final stage in the preparation of a project. It is theProject appraisal is the final stage in the preparation of a project. It is the

analysis of costs and benefits of a proposed project with the goal ofanalysis of costs and benefits of a proposed project with the goal ofassuring a rational allocation of limited funds among alternative investmentassuring a rational allocation of limited funds among alternative investmentopportunities in view of achieving specified goals. It is done both by theopportunities in view of achieving specified goals. It is done both by the

management and the financial institution providing long-term loan for themanagement and the financial institution providing long-term loan for theproject. While deciding on financial support to a project, the financialproject. While deciding on financial support to a project, the financialinstitution, in general, would like to appraise the feasibility of the project.institution, in general, would like to appraise the feasibility of the project.

Different Types of project AppraisalDifferent Types of project Appraisal

The financial institutions, before giving financial support for the project,The financial institutions, before giving financial support for the project,take into consideration the following appraisals-take into consideration the following appraisals-


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Technical appraisal:Technical appraisal: It is the study of the project to evaluate its technical aspectsIt is the study of the project to evaluate its technical aspects

including technology and design, production process, plant layout,including technology and design, production process, plant layout,material inputs, capacity, and project schedule. The status of thematerial inputs, capacity, and project schedule. The status of the

technical know-how and design envisaged in the project should betechnical know-how and design envisaged in the project should befully assessed which should have the following attributes:fully assessed which should have the following attributes: The technology and design should be one already tested andThe technology and design should be one already tested and

established.established. The know-how already within the country and currently in use should beThe know-how already within the country and currently in use should be

explored and compared with that envisaged in the project.explored and compared with that envisaged in the project. The technology envisaged in the project should be the latest. ProjectsThe technology envisaged in the project should be the latest. Projects

without the latest technology lead to obsolescence. Latest technology,without the latest technology lead to obsolescence. Latest technology,though, is costly in the initial stages, will be economical in the long run.though, is costly in the initial stages, will be economical in the long run. When a technology is acquired from a multinational company under aWhen a technology is acquired from a multinational company under a

collaboration, care should be taken to see that the technology is notcollaboration, care should be taken to see that the technology is notobsolete. In many cases, MNCs try to get rid of obsolete technology atobsolete. In many cases, MNCs try to get rid of obsolete technology ata higher cost.a higher cost.


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Economical Appraisal:Economical Appraisal: It is the study of the project to evaluate the economicIt is the study of the project to evaluate the economic

justification in investing the project. Such a study is not onlyjustification in investing the project. Such a study is not onlylimited to a profitable financial return but also takes care tolimited to a profitable financial return but also takes care toensure the following:ensure the following:

Existence is an alternative better way to achieve the projectExistence is an alternative better way to achieve the projectobjectives.objectives.

The project merit by the cost benefits analysis.The project merit by the cost benefits analysis.

The market survey report prepared either by the company orThe market survey report prepared either by the company orthe independent consultant should be examined to find outthe independent consultant should be examined to find outthe following:the following: Details of the total market.Details of the total market. The competition involved and the projected market share.The competition involved and the projected market share.

The expected growth in the demand for the product.The expected growth in the demand for the product. The basis of estimating the selling price of the product.The basis of estimating the selling price of the product.


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Organizational AppraisalOrganizational Appraisal::

It represents proper evaluation of the organizational and managerial aspects of the projectIt represents proper evaluation of the organizational and managerial aspects of the project

to ensure the compatibility of the projected organization and management with its sizeto ensure the compatibility of the projected organization and management with its sizeand complexity. A project which is considered technically feasible, economicallyand complexity. A project which is considered technically feasible, economicallyviable and financially sound may run into difficulties if it is not backed by sound andviable and financially sound may run into difficulties if it is not backed by sound andefficient management. Hence, its importance.efficient management. Hence, its importance.

A good project report should have the following attributes:A good project report should have the following attributes:

1. It must have a well knit project organization structure.1. It must have a well knit project organization structure.

2. The organization should have an overall in-charge as project manager with the quality2. The organization should have an overall in-charge as project manager with the quality

of strong leadership, effective communicating ability and required theoretical andof strong leadership, effective communicating ability and required theoretical andtechnical skills.technical skills.

3. The organization should be interlaced so that the project work is carried out in a unified3. The organization should be interlaced so that the project work is carried out in a unifiedway.way.

4. The managerial personnel heading the different functions should be duly skilled in their4. The managerial personnel heading the different functions should be duly skilled in theirrespective functions to carry out the project implementation and operation.respective functions to carry out the project implementation and operation.

5. The organization should take care of the technical training required for the production5. The organization should take care of the technical training required for the production

process.process.6. the organization should institute a well-balanced standard personnel policy before6. the organization should institute a well-balanced standard personnel policy beforemaking large-scale recruitments. There should be a skilled personnel manager.making large-scale recruitments. There should be a skilled personnel manager.


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Commercial appraisal:Commercial appraisal:

It involves study of the proposed arrangement for the purchase of rawIt involves study of the proposed arrangement for the purchase of rawmaterials and sale of finished products.materials and sale of finished products.

The basic question to be asked in this respect is whether arrangementsThe basic question to be asked in this respect is whether arrangementshave been made for uninterrupted supply of inputs needed in thehave been made for uninterrupted supply of inputs needed in theoperation and to determine the market demand as well s marketingoperation and to determine the market demand as well s marketingchannels for the supply of finished products.channels for the supply of finished products.

Its main objective is to see that the proposed arrangements will ensureIts main objective is to see that the proposed arrangements will ensure

that the best value is obtained for money spent.that the best value is obtained for money spent. Financial appraisal:Financial appraisal:

The aim of carrying on a business is to earn more and more surplusThe aim of carrying on a business is to earn more and more surplusand grow. It is worthwhile to spend money only on that investmentand grow. It is worthwhile to spend money only on that investmentwhich shows generation of money in reasonable excess of the totalwhich shows generation of money in reasonable excess of the totalinvestment in the project. The management has to take a decision as toinvestment in the project. The management has to take a decision as togo or not to go with the projected investment .To have a cleargo or not to go with the projected investment .To have a clearunderstanding of the viability of the project, various financial analysesunderstanding of the viability of the project, various financial analysesof the project will have to be undertaken.of the project will have to be undertaken.

But, before going into such analyses, the following points are toBut, before going into such analyses, the following points are tobe kept in mind.be kept in mind.


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1.1. EEstimates in the project report:stimates in the project report: Every project report contains estimatesEvery project report contains estimatesregarding the probable expenses and revenue which may include:regarding the probable expenses and revenue which may include:

Monetary estimates regarding the cost of investment, projected expenses, and theMonetary estimates regarding the cost of investment, projected expenses, and thegovernment subsidy.government subsidy.

Fiscal matter based on various tax laws, their relevant applicability on the projectFiscal matter based on various tax laws, their relevant applicability on the project

their effects on the profitability of the projected businesstheir effects on the profitability of the projected business Time estimates which include estimation of the period required in the procurementTime estimates which include estimation of the period required in the procurement

of men, material, machines and money; the credit period to be offered to theof men, material, machines and money; the credit period to be offered to theprobable customers; and lead time required by the suppliers.probable customers; and lead time required by the suppliers.

1.1. Risk factor in business:Risk factor in business: There is some element of risk in every business.There is some element of risk in every business.Higher the risk, greater will be profit. Therefore, the element of risk will haveHigher the risk, greater will be profit. Therefore, the element of risk will haveto be estimated.to be estimated.

3.3. Unforeseen situation:Unforeseen situation: A project may be a very professional one with highA project may be a very professional one with highquality estimates showing profitability. But things may be totally different duequality estimates showing profitability. But things may be totally different dueto change in circumstances by unnatural or unforeseen events so that theto change in circumstances by unnatural or unforeseen events so that theactual may deviate from the estimates. Natural calamities, change inactual may deviate from the estimates. Natural calamities, change ingovernment policy due to change in political situation, pollution control,government policy due to change in political situation, pollution control,Greenpeace Movement, ecological balance etc .are examples of suchGreenpeace Movement, ecological balance etc .are examples of suchunforeseen events. These may adversely affect the managements analysisunforeseen events. These may adversely affect the managements analysisof the project.of the project.


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FINANCIAL TECHNIQUES FOR PROJECT APPRAISALFINANCIAL TECHNIQUES FOR PROJECT APPRAISAL Before taking a decision on the proposed investment, aBefore taking a decision on the proposed investment, a

thorough financial analysis is to be made on the basis of certainthorough financial analysis is to be made on the basis of certainwell-established financial techniques with the projected figures.well-established financial techniques with the projected figures.

There are many such financial techniques to evaluate theThere are many such financial techniques to evaluate theprojected returns against the projected investment. Theprojected returns against the projected investment. Thecommonly suggested appraisal methods are:commonly suggested appraisal methods are: Payback periodPayback period Discounted payback periodDiscounted payback period Average rate of returnAverage rate of return

Net present valueNet present value Internal rate of returnInternal rate of return Profitability indexProfitability index


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PAYBACK PERIOD:PAYBACK PERIOD:It denotes the length of time until the sum total of the estimated cash flowsIt denotes the length of time until the sum total of the estimated cash flows

generated from the project equals the investment cost. The shorter the length ofgenerated from the project equals the investment cost. The shorter the length oftime, the better for the project owner. It is calculated by the following formula:time, the better for the project owner. It is calculated by the following formula:

Payback period=Payback period= Origin cost of investmentOrigin cost of investmentAnnual cash inflows or savingsAnnual cash inflows or savings

For example, a project requires an investment of Rs. 1,20,000 and has anFor example, a project requires an investment of Rs. 1,20,000 and has anestimated life of 8 years promising cash savings of Rs. 40,000 (beforeestimated life of 8 years promising cash savings of Rs. 40,000 (beforedepreciation but after tax).depreciation but after tax).

The payback period will be 3 years, i.e. 1,20,00/40,000 =3 years.This tells theThe payback period will be 3 years, i.e. 1,20,00/40,000 =3 years.This tells thefinance manger that if the net cash gains after taxes continue for at least 3finance manger that if the net cash gains after taxes continue for at least 3

years, the firm will recoup its net investments.years, the firm will recoup its net investments.When the cash gains generated by the project are unevenly distributed , one has toWhen the cash gains generated by the project are unevenly distributed , one has to

take into account cumulative cash gains resulting from the project until the yeartake into account cumulative cash gains resulting from the project until the yearin which the running total is equal to the amount of investment outlay.in which the running total is equal to the amount of investment outlay.

For example, the payback period can be worked out from theFor example, the payback period can be worked out from thefigures given below:figures given below:

Initial investment Rs 81 000Initial investment Rs 81 000


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YearYear Net cash inflowNet cash inflow Accumulated net cash inflowsAccumulated net cash inflows

11 7,9007,900 7,9007,900

22 18,50018,500 26,40026,400

33 26,50026,500 52,90052,90044 50,00050,000 1,02,9001,02,900

55 56,30056,300 1,59,3001,59,300

Initial investment-Rs.81,000Initial investment-Rs.81,000

It is seen from the above table that the initial investment of Rs.81,000 is made after 3 years and

before the fourth year end. By interpolation, the recovery of Rs.81,000 is made as follows:Rs.52,900 is net earning after 3years.the balance 28,100(i.e. 81,000-52,900) is earned on the

fourth year.

Rs.50,000 is earned in 12 months of the complete fourth year (i.e. 1,02,900-52,900=50,000)

Thus 28,000 is earned in 28,100 x 12 =7 months

50,000

Therefore, the payback period is 3 years + 7 months =3.7 years. If the management is

looking for a payback period of 4 years, this period of 3.7 years being less than 4 years,

a decision in favour of this investment can be taken by it.


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The following are the merits of payback period method of financial analysis:The following are the merits of payback period method of financial analysis: Simple to understand and easy to calculate.Simple to understand and easy to calculate. Emphasizes on the liquidity, i.e. cash.Emphasizes on the liquidity, i.e. cash.

Very important for cash forecasting, budgeting and cash flow analysis.Very important for cash forecasting, budgeting and cash flow analysis.

Can be used profitably for short-term capital projects which start yielding returns in theCan be used profitably for short-term capital projects which start yielding returns in theinitial years.initial years.

Minimizes the possibility of losses through obsolescence.Minimizes the possibility of losses through obsolescence.

The basic drawbacks of this method are:The basic drawbacks of this method are: Requires estimation of a safe period which, in reality, varies from industry to industry;Requires estimation of a safe period which, in reality, varies from industry to industry;

e.g. in heavy industry the payback period will be very long.e.g. in heavy industry the payback period will be very long.

Ignores the time value of money; the cash inflows in future years are, in reality,Ignores the time value of money; the cash inflows in future years are, in reality,worthless today.worthless today. Disregards the cash flow subsequent to the payback period.Disregards the cash flow subsequent to the payback period. Unsuitable while comparing the payback periods of two or more projects where the netUnsuitable while comparing the payback periods of two or more projects where the net

cash inflows are of widely different amounts for different projects.cash inflows are of widely different amounts for different projects. In spite of these drawbacks, decisions on short term investment can be taken on theIn spite of these drawbacks, decisions on short term investment can be taken on the

basis of this method.basis of this method.


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Discounted Payback Period:Discounted Payback Period: One of the drawbacks of payback periodOne of the drawbacks of payback periodmethod is that it ignores te time value of money. The discountedmethod is that it ignores te time value of money. The discountedpayback period method is suggested to overcome this limitation. Underpayback period method is suggested to overcome this limitation. Underthis method, the future cash flows are discounted at certain rate tothis method, the future cash flows are discounted at certain rate toarrive at their present value. The discounted payback period representsarrive at their present value. The discounted payback period represents

the period by which the estimated future cash inflows discounted as onthe period by which the estimated future cash inflows discounted as ondate recover the investment costs. This method is same as the paybackdate recover the investment costs. This method is same as the paybackperiod with the difference that the net cash inflows of future years areperiod with the difference that the net cash inflows of future years arediscounted to the present value.discounted to the present value.

The discounting of the future cash is explained below.The discounting of the future cash is explained below.

Rs.100 @10% p.a. becomes 110 after 12 months, when discountedRs.100 @10% p.a. becomes 110 after 12 months, when discounted@10%, is worth 100 today.@10%, is worth 100 today.

It is found out by:It is found out by:PP

100+r100+r nn

100100

Where P= Amount of future inflowWhere P= Amount of future inflow

r = rate of discountr = rate of discountn= Number of years relating to the inflown= Number of years relating to the inflow

In this example, the discounted value will beIn this example, the discounted value will be

110110 =100=100

100+10100+10 11

100100


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Average Rate of Return :Average Rate of Return :

This method is also known as Average Accounting return or Average return onThis method is also known as Average Accounting return or Average return oninvestment .investment .

Under this method, the entire life of a project is taken into account.Under this method, the entire life of a project is taken into account.

It represents the rate of return which the average projected investment earns per annum.It represents the rate of return which the average projected investment earns per annum.The earnings means the annual average of the projected net earnings, i.e. income afterThe earnings means the annual average of the projected net earnings, i.e. income after

depreciation and taxes. It can be calculated as follows:depreciation and taxes. It can be calculated as follows:

ARR=ARR= Average annual net earningsAverage annual net earnings x 100x 100

Average cost of investmentAverage cost of investmentAverage investmentAverage investment = I= Investment at the beginning + Investment at the endnvestment at the beginning + Investment at the end

22

Example:


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Assume that a firm is considering an investment project and the cost of the

same is Rs.50,000, the economic life of the project is 5 years. The net profits

after tax from the project for 5 years are as follows:Years Profit

1 3000

2 40003 3000

4 2000

5 1000

The salvage value after economic life is estimated atRs.5000.The ARR can be calculated as follows:

Average net income = 3,000+ 4,000+3,000+2,000+1,000 = 3,000 = 2,600

5 5

Average investment = 50,000 + 5,000 = 27,500

5

ARR = 2,600x100 =9.5 %

27,500

Decision rule:

The project which has the highest return is given the first rank, the project with the

next highest rank is given the second rank, and so on.

If the managements expected rate of return is 8%, a decision can be taken in favour

of this project.


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NET PRESENT VALUE METHOD:NET PRESENT VALUE METHOD: It represents the difference between the market value of investmentsIt represents the difference between the market value of investments

representing the presenting worth and its cost.representing the presenting worth and its cost. This means that there is sufficient value addition by launching on the project.This means that there is sufficient value addition by launching on the project.

Otherwise, the investor would like to keep the money as deposits with the bankOtherwise, the investor would like to keep the money as deposits with the bank

or rank-one business organization earning considerable interest without suchor rank-one business organization earning considerable interest without suchrisk in such investment.risk in such investment.

The NPV method is a system of finding out the present value of future net cashThe NPV method is a system of finding out the present value of future net cashflows. The following steps are involved in its estimation:flows. The following steps are involved in its estimation:

Find out the project cost incurred at the start of the projectFind out the project cost incurred at the start of the project Find out the future cash flows as estimated for the projected business.Find out the future cash flows as estimated for the projected business. Select an appropriate rate and a period to find out the present value of the future netSelect an appropriate rate and a period to find out the present value of the future net

cash flows for the period by discounting the same by the selected rate.cash flows for the period by discounting the same by the selected rate. If any investment is made in later years, It should be discounted by the same rate.If any investment is made in later years, It should be discounted by the same rate.

Thus, the present value of the total investment is arrived at.Thus, the present value of the total investment is arrived at. Find out the difference between the present value of cash inflows and the investmentFind out the difference between the present value of cash inflows and the investment

cost and this difference represents NPV.cost and this difference represents NPV.

Decision rule:Decision rule: In the case of mutually exclusive or alternative projectsIn the case of mutually exclusive or alternative projects

( where only one is to be selected), accept a project( where only one is to be selected), accept a projectthat has the highest NPV.that has the highest NPV. In case of independent investment, accept a project ifIn case of independent investment, accept a project if

its NPV is greater than or equal to zero.its NPV is greater than or equal to zero. If NPV is negative, reject it.If NPV is negative, reject it.


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Example:Example:

A firm is considering an investment proposal costing Rs.20,000 today and willA firm is considering an investment proposal costing Rs.20,000 today and willproduce a cash inflow of Rs.6,000 a year for the next 5 years. The firmsproduce a cash inflow of Rs.6,000 a year for the next 5 years. The firmscost of capital is 12%. The NPV can be calculated as follows:cost of capital is 12%. The NPV can be calculated as follows:

Present value of outlays = Rs. 20,000Present value of outlays = Rs. 20,000Present value of inflows Rs.6,000 annuity for 5 years at 12%Present value of inflows Rs.6,000 annuity for 5 years at 12%

From annuity table Rs.6000 x 3.605= 21,630From annuity table Rs.6000 x 3.605= 21,630

Present value of inflowPresent value of inflow Rs.21,630Rs.21,630

Present value of outflowsPresent value of outflows Rs.20,000Rs.20,000

Net present valueNet present value Rs. 1630Rs. 1630

The investment proposal has an NPV of Rs. 1630. Since it is a positive NPV, itThe investment proposal has an NPV of Rs. 1630. Since it is a positive NPV, it

indicates that the return on the project exceeds the cost of capital. The promisesindicates that the return on the project exceeds the cost of capital. The promisesa 12% return plus an additional return of Rs.1630, i.e. 21630-20,000.a 12% return plus an additional return of Rs.1630, i.e. 21630-20,000.

Applying the decision rule, since the NPV is positive, the project can be accepted.Applying the decision rule, since the NPV is positive, the project can be accepted.


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Internal Rate of Return:Internal Rate of Return: This method seeks to find the earnings rate at which the present valueThis method seeks to find the earnings rate at which the present value

of streams of cash gain equals the amount of the investment outlay.of streams of cash gain equals the amount of the investment outlay. IRR is defined as that rate of return which would equate the presentIRR is defined as that rate of return which would equate the present

value of capital expenditure to the present value of the net cash inflows.value of capital expenditure to the present value of the net cash inflows. Thus, it is the rate of discount which would reduce the sum of theThus, it is the rate of discount which would reduce the sum of the

present value of net cash inflow over the project life (includingpresent value of net cash inflow over the project life (includingconstruction period) to Zero.construction period) to Zero.

If this rate is greater than the cost of capital, it means that the fundsIf this rate is greater than the cost of capital, it means that the fundscommitted will earn more than their cost.committed will earn more than their cost.

When IRR equals the cost of capital, the firm in theory would beWhen IRR equals the cost of capital, the firm in theory would be

indifferent to the proposal in question as it would not be expected toindifferent to the proposal in question as it would not be expected tochange the firms value.change the firms value.

Thus, the decision is in favour of the project when the IRR exceeds theThus, the decision is in favour of the project when the IRR exceeds theexpected return from investment.expected return from investment.


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Profitability Index:Profitability Index:It represents the relationship between the present value of the futureIt represents the relationship between the present value of the future

earnings and the cost of investment. This index can be computed only ifearnings and the cost of investment. This index can be computed only ifthe NPV method has been used. The rule is that the project with thethe NPV method has been used. The rule is that the project with the

highest positive NPV should be selected. Obviously, if there is ahighest positive NPV should be selected. Obviously, if there is apositive NPV, the index will be more than 1, and if the index will bepositive NPV, the index will be more than 1, and if the index will benegative when the NPV is negative.negative when the NPV is negative.

Being almost similar to NPV, if higher is the index, such a project is chosenBeing almost similar to NPV, if higher is the index, such a project is chosenfor investment. Profitability index (PI) is calculated as follows:for investment. Profitability index (PI) is calculated as follows:

PI =PI = Present Value of inflowsPresent Value of inflows

Present value of outflows (investment)Present value of outflows (investment)


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Project Implementation:Project Implementation:Another step in the lifespan of project management is the implementation of theAnother step in the lifespan of project management is the implementation of theproject.project.

The level of activities mount up to peak during the stage of implementation andThe level of activities mount up to peak during the stage of implementation andtaper down to zero on completion.taper down to zero on completion.

A number of special techniques are employed by the project management whenA number of special techniques are employed by the project management whenthe project implementation travels through its life cycle.the project implementation travels through its life cycle.

For the successful implementation of a large project, the organization launchingFor the successful implementation of a large project, the organization launchingthe project should first develop a project management team.the project should first develop a project management team.

The team should comprise professionals such as engineers, and accountantsThe team should comprise professionals such as engineers, and accountants

with responsibilities in the respective fields.with responsibilities in the respective fields. The team should be headed by a project manager.The team should be headed by a project manager. The team should be able to complete the implementation of the project withinThe team should be able to complete the implementation of the project within

the projected schedule, and the projected cost and deliver the project withthe projected schedule, and the projected cost and deliver the project withdefinite quality.definite quality.

Documents

Project Management- Santosh Parashar