Project Cycle: Identification & Preparation

• A project is a scheme, or part of one, used to invest resources that can be evaluated as an independent unit.

Reasons for Defining a Project

• To determine the project's scope, required investments, funding sources and implementation period.
• In order to analyze and evaluate its investment merits.

Project Cycle

• Series of activities/steps a project takes from conceptualization to operation

Project Cycle Phases

• Project Identification
• Project Preparation
• Project Appraisal
• Documentation
• Project Supervision

Project Identification

• The process of seeking out possible investment projects

Project Preparation

• Preliminary assessment of the project via initial designs, alternative processes, and financial calculations.

Project Appraisal

• Comprehensive review of the project's technical, market, financial, managerial, and economic aspects to ensure feasibility.

Documentation

• Translation of findings during the project appraisal stage into formal records.

Project Supervision

• Management of the project through implementation, construction, and operation to ensure it is executed as planned.

Functions in the Project Cycle

• Market/Commercial
• Technical
• Financial
• Economic
• Managerial

Why Identify Project?

• To maximize the usage of scarce resources based on the investment objectives.

Guides to Identify Project Opportunities

• Study Imports/Exports
• Investigate Local Materials and Resources
• Study Available Skills
• Monitor Economic Indicators
• Make Industry Studies
• Originate or Apply Technology
• Examine Inter-Industry Relationship
• Evaluate Development Plans
• Review Old Projects
• Observe Experience Elsewhere
• Use Standard Industry Classification Lists

Importance of Feasibility Studies

• Provide investors with vital information for deciding the extent of their business proposals.
• Financial institutions require feasibility studies for loan applicants borrowing beyond a certain loan ceiling.
• Scope: Pre-operating, Management, Marketing, Production/Technical, Financial, and Socio-Economic feasibilities.
• Nature: Best way of gauging the correctness is the practicality of being implemented in a specified future time.

Project Cost

• Approximate investment requirements from conception to commercial operations.
• Factors Affecting Project Feasibility Cost
  • Size
  • Nature
  • Depth
  • Availability of Data
  • Length of the Project

Pre-Operating and Organizational Expenses

• Based on actual and projected expenditures from project inception until commercial operations start.
  • Initial Investigations
  • Research and Technical Analysis
  • Design studies
  • Legal advice
  • Incorporation papers, issuance of shares
  • Initial advertisement
  • Establishment of a sales network

Land

• The amount invested by the proponent, including notarial and registration fees

Machinery and Equipment

• Should cover main process equipment and auxiliary equipment
  • Quotations
  • Past experience
  • Machinery dealers and suppliers
  • Rapid cost estimate

Marine Insurance and Freight

• Includes inland freight, ocean freight, and handling expenses up to the destination port.
• Past experience from insurance firms/shipping companies/freight forwarders with the necessary equipment details.

Customs Duties and Taxes

• Most imported articles are subject to these, except when exempted by government decree, special arrangement, or incentives.
• Bank Charges: Fees incurred during the opening of the letter of credit for equipment.

Process Acquisition/Patent s/Licenses

• Based on the actual contract with the process supplier or process owner.
• Some patents and licenses charged based on sales/profits percentage. Only payable portion (if any) prior to commercial operations is part of project costs.

Technical Assistance

• Based on actual expenditures, including board, lodging, stipends, and transportation for technicians.
• Installation and start-up assistance given free and are part of machinery and equipment cost in most cases.

Financial Charges During Construction or Pre-Operating Period

• Often left out but must be included in the estimate. A real cost, particularly for projects with large loan requirements and gestation periods.
• Working Capital: Fund for day-to-day operations tied up in raw materials, work-in-process, finished goods, accounts receivables, and operating cash to ensure uninterrupted flow.
• Components of Working Capital:
  • Raw Material Inventory
  • Work-in Process
  • Finished Goods
  • Account Receivables
  • Operating Cash
  • Other working capital requirements

Provision for Contingencies

• Accidental events
• Changes in general conditions
• Imperfections in estimates
• Oversights
• Arithmetic Errors

Rapid Cost Estimate Methods

• Unit Price
• Six-tenths Factor
• Capacity Adjustment by Exponential Method

Project Timetable

• Lists individual events or activities from conceptualization to operation, according to time scale and precedence.
• Funds Drawdown Schedule: Indicates when funds for activities should be withdrawn/disbursed. Significant for fund preparation and financial charge computation.

Marketing

• Planning and executing the conception, pricing, promotion, and distribution of ideas, goods and services to satisfy individual and organizational objectives, primarily concentrating on buyers/consumers.

Objective of Marketing

• Determine the extent to which goods/services are needed or demanded to design appropriate plans ensuring output reach and acceptance.

Target Market

• Specific group of customers a company aims to capture, whose needs or wants can be met with the company's products or services.

Ways to Identify Target Markets

• Geographic : Location, area size, density, and climate.
• Demographic : Age, gender, income, family, occupation, and education.
• Psychographic : Personality, behavior, lifestyle, rate of use, benefits sought, and loyalty.
• Behavior: Needs that seek fulfillment of the level of knowledge, information sources, attitude, use or response to a product

Survey Formula for Sample Size

• Useful for computing the sample size with the proportion formula: n = (z^2 * pq) / e^2

Demand

• Total volume to be bought in a defined marketing environment.
• Demand Analysis: Estimating market demand involving identifying and analyzing determinants, estimating past and present demand, and projecting future demand.
• Demand Determinants: Population, Income, Prices, Substitution Possibilities, Changes in User's Taste, Rate of Investments, and Government Policies and Budget.
• Projecting Demand Methods: Survey of people's intentions assess relevant information.

Expert's Opinion

• Group discussion method
• Pooled individual estimate method
• Delphi approach

Time Series Analysis

• Assumes past trends will continue.

Components of Time Series

• Trend: Gradual, long-term movement in data.
• Seasonality: Short-term, regular variations related to weather or human factors like holidays.
• Cyclical Variations: Wavelike variations longer than a year.
• Irregular variations: Due to unusual circumstances like severe weather or strikes.

Demand Projection Methods

• Linear Regression (Straight Line Method): Assumes linear relationship between variables, with time as the independent variable.
• Statistical Parabolic Method: Curvature is advantageous but may show incorrect decline or exclude qualitative info.
• Exponential Curve: Growth increases by constant ratio or percentage.
• Trend Analysis: Uses linear and nonlinear regression with time as the explanatory variable where pattern is over time.
• Moving Average Analysis: Forecasts based on a weighted average of past values.
• Weighted Moving Averages: Uses sum-of-the-digits and trend adjustment methods for repeated forecasts.
• Exponential Smoothing: Moving average form for time series forecasting using several forms based on the presence of trend or cyclical variations.
• Modeling and Simulation: Uses equations describing situations allowing impact testing of factors but time-consuming.
• Probabilistic Models: Monte Carlo simulation techniques deal with a range of outcomes under uncertainty.
• Statistical Demand Analysis: Quantifies the functional relationship between level of demand and determinants.
• Use of Planning Standards: Uses coefficients to project product demand.

Market Testing

• Used when potential beneficiaries are uncertain and are not consistent.
• Supply: Total market volume at a price and area.

Three Major Sources of Supply Data

• Local:Measured by taking into consideration competitor's rated capacities

• Importations

• Product Substitutes

• Supply Projection: Same as demand projection.

• Demand and Supply Analysis: Derived by comparing demand and supply projections.

Pricing Considerations

• Legal pricing laws
• Consumer behavior
• Competitor's policies
• Seasonality
• Price limits
• Availability of product(s)
• Discounts
• Profit target

Distribution Channel

• Path taken by goods to consumers.

Two Main Distribution Activities

• Transporting
• Warehousing

Promotions

• Designed to inform buyers and influence purchases.

Test your understanding of project identification, preparation, and appraisal within the project cycle. Questions cover opportunity identification, feasibility reviews, investment characteristics, and competitive analysis. Evaluate your knowledge of project management principles.