Project Management Course Notes PDF

ADDIS ABABA UNIVERSITY College: Business and Economics Department: Management Program: Master of Business Administration (MBA) Course Title: Project Management  Course Description Project management course aims at providing students with the fundamen...

ADDIS ABABA UNIVERSITY College: Business and Economics Department: Management Program: Master of Business Administration (MBA) Course Title: Project Management  Course Description Project management course aims at providing students with the fundamental knowledge and basic tools and techniques of project management It helps to develop requisite skills of practical application of project management that includes largely project management concepts, project planning, control tools and techniques for project success. The course covers project types, life cycles, and management issues related to project initiation, planning, organization, scheduling, resource allocation, implementation and project monitoring and control. As deemed necessary, the delivery of this course encompasses a wide range of methods including lectures, class discussions, readings, case studies, group work, and presentations  Course Contents Chapter One: Overview of Project and Project Management o Project and Project Management Fundamental Project Characteristics o Primary Objectives of a Project o Link between Plans, Programs and Projects o Project management: An Integrative Approach o Integration of Project Management with Strategic Plan o Project Management Knowledge areas Chapter Two: Project Life Cycles- Brief review (Largely independent study) o What is a project cycle and why the need o World bank (Baum) project cycle o UNIDO project cycle Chapter Three: Project Management Structures/ Leadership o Organizing Projects within the Functional Organization o Matrix Organizations o Project Team Organization o Hybrid Organizations Chapter Four: Project Appraisal Process o Project initiation/identification o Pre-feasibility and feasibility studies (Independent study)  Defining the Project Task (Scope)  Market Analysis  Technical Analysis  Economic Analysis  Financial Analysis Chapter Five: Scheduling resources and costs o Work Breakdown Structures o Identifying resources and sequencing activities o Estimating the project activity times and costs o Bar Charts o Developing the project network o Critical path analysis using arrow diagrams o Reducing project duration Chapter Six: Managing project risk (Independent review) o Identifying the Possible Risks o Risk Appraisal and Analysis o Risk Register o Dealing with Risks Chapter Seven: Implementing the project plan, monitoring progress, performance evaluation and closure o Project Authorization o The project control process o Managing Progress – Tracking Gantt chart and PERT o Earned value cost/schedule system of performance evaluation o Closure report o Lessons learnt Teaching and learning techniques The teaching and learning techniques for this course encompasses lectures, class discussions, readings, case studies, group and individual project work, and presentations Assignment Group work 1. Review of previously completed projects ( industrial/ developmental 2. Develop a new industrial project feasibility study and project plan  References Gray, C.F and Larson, E.W. 2018. Project Management: The Managerial Process, 7th ed. USA: McGraw-Hill  Chandra, P. 2009. Projects: Planning Analysis, Financing, Implementation, and Review, 7th ed. New Delhi: Tata McGraw Hill.  Heagney, J. 2012. Fundamentals of Project Management, 4th ed. USA: American Management Association  Kerzner, H. 2009. PROJECT MANAGEMENT: A Systems Approach to Planning, Scheduling, and Controlling, 10th ed. USA: John Wiley & Sons, Inc.  Lester, A. 2014. Project Management, Planning and Control, 6th ed. Elsevier Ltd.  Lewis, J.P. 2007. Fundamentals of project management, 3rd ed. USA: American Management Association  Meredith, J.R. and Mantel, S.J. 2012. PROJECT MANAGEMENT: A Managerial Approach, 8th ed. USA: John Wiley & Sons, Inc.  Project Management Institute. 2013. A guide to the project management body of knowledge, 5th ed. USA: Project Management Institute, Inc.  UNIDO, 1991. A Manual for the Preparations of Industrial Feasibility Studies  Any project management book  Chapter One Overview of Project and Project Management Defining a Project? An intervention that consists of a set of planned, interrelated activities designed to achieve defined objectives within a given budget and a specified period of time. A series of activities aimed at bringing about clearly specified objectives within a defined time-period and with a defined budget. Projects can be viewed as having four essential elements: a specified timeframe, an orchestrated approach to co-dependent events, a desired outcome, and unique characteristics.  WHAT IS A PROJECT?  A project is an interrelated set of activities that has a definite starting and ending point and results in the accomplishment of a unique, often major outcome.  A project is a series of activities aimed at bringing about clearly specified objectives within a defined time-period and with a defined budget. [Aid Delivery Methods, Project Cycle Managreement Guidelines Volume 1, March 2004]  WHAT IS A PROJECT?  A project is a proposal for an investment to create, expand and/or develop certain facilities in order to increase the production of goods and/or services in a community during a certain period of time (World Bank)  A project is unique set of coordinated activities, with definite starting and finishing points, undertaken by an individual or organization to meet specific objectives within defined schedule, cost and performance parameters.’ What is a Project? A project is a complex set of activities where resources are used in expectation of returns and which lends it to planning, financing and implementing as a unit. It usually has a well defined sequence of investment and production activities and a specific group of benefits that can be identified, quantified and valued either socially or monetarily. A project also has boundaries which make it to be distinguishable from another project. In addition to its time sequence of investments, production and benefits, the project normally has a specific geographical location, with identifiable targets and beneficiaries. Defining a Project?... 1. A project is an exception. Unlike routines, projects involve investigation, compilation, arrangement, and reporting of findings in some way that provides value. The answers to the basic project questions cannot be found in the routines of your department, which is what makes it exceptional. The processes involved with the project fall outside your department’s ‘‘normal’’ range of activities and functions. 2. Unique Activities The activities in a project must be unique. A project has never happened before, and it will never happen again under the same conditions. Something is always different each time the activities of a project are repeated. No two projects are the same. Projects differ from each other with regard to time and space, deliverables or outputs as well as other characteristics of the projects.  Defining a Project?... 3. Project goals and deadlines are specific. Recurring tasks invariably are developed with departmental goals in mind. Projects have identifiable starting and stopping points. Whereas departmental routines are general in nature, project activities are clearly specific. Projects have a specified completion date. This date can be self-imposed by management or externally specified by a customer or government agency. All projects have start-up and close-down stages. However, projects may often have intended and unintended social, economic and environmental impacts that far outlast the projects themselves. 4. The desired result is identified. A project is well defined only when a specific result is known. By comparison, departmental routines involve functions that may be called ‘‘process maintenance.’’ That means that rather than producing a specific outcome, a series of recurring routines are aimed at ensuring the flow of outcomes (e.g., reports) from one period to another.  Defining a Project?... 1. A project is a sequence of unique, complex, and connected activities having one goal or purpose and that must be completed by a specific time, within budget, and according to specification. This definition tells you quite a bit about a project. To appreciate just what constitutes a project take a look at each part of the definition. 2. Project activities are related, regardless of departmental routines. Projects are rarely so restricted in nature that they involve only one department. The characteristics of a department involve related routines, but projects are not so restricted. Thus, a project is likely to involve activities that extend beyond your immediate department, which also means that your project team may include employees from other departments. Highly interactive with other agencies – Project execution involves a high degree of interaction with agencies within (internal departments) and outside the organization (e.g. suppliers, government agencies, etc.). Need-based/problem driven: A project is generally initiated by a perceived need in an organisation  Defining a Project?... Connected Activities/Interdependencies. Connectedness implies that there is a logical or technical relationship between pairs of activities. There is an order to the sequence in which the activities that make up the project must be completed. They are considered connected because the output from one activity is the input to another. A project consists of a number of interrelated activities that are performed sequentially or in parallel. What is needed as input in order to begin working on this activity? What activities produce those as output?  Defining a Project?... The output of one activity or set of activities becomes the input to another activity or set of activities. Specifying sequence based on resource constraints or statements such as “Abebe will work on activity B as soon as he finishes working on activity A” should be avoided because they establish an artificial relationship between activities. What if Abebe wasn’t available at all? Resource constraints aren’t ignored when you actually schedule activities. The decision of what resources to use and when to use them comes later in the project planning process.  Defining a Project?... Complex Activities The activities that make up the project are not simple, repetitive acts, such as mowing the lawn, painting the house, washing the car, or loading the delivery truck. They are complex. For example, designing an intuitive user interface to an application system is a complex activity. Sequence of Activities A project comprises a number of activities that must be completed in some specified order, or sequence. An activity is a defined chunk of work. The sequence of the activities is based on technical requirements, not on management prerogatives. To determine the sequence, it is helpful to think in terms of inputs and outputs.  Defining a Project?... Progressive Elaboration Projects are developed in steps. This means that the project scope will be broadly described early in the project and becomes more explicit and detailed as the project team develops better and more complete understanding of the objectives and deliverables. We learn more and more about the project as it goes on.  Defining a Project?... One Goal or Purpose Projects must have a single goal, for example, to design an inner-city playground for ADC (Aid to Dependent Children) families. However, very large or complex projects may be divided into several subprojects, each of which is a project in its own right. This division makes for better management control. A project has a purpose and all aspects of the project articulation must support that purpose.  Defining a Project?... Within Budget Projects also have resource limits, such as a limited amount of people, money, or machines that are dedicated to the project. While these resources can be adjusted up or down by management, they are considered fixed resources to the project manager. According to Specification The customer, or the recipient of the project’s deliverables, expects a certain level of functionality and quality from the project. These expectations can be self-imposed, such as the specification of the project completion date, or customer- specified, such as producing the sales report on a weekly basis.  Defining a Project?... Although the project manager treats the specification as fixed, the reality of the situation is that any number of factors can cause the specification to change. For example, the customer may not have defined the requirements completely, or the business situation may have changed (this happens in long projects). It is unrealistic to expect the specification to remain fixed through the life of the project. Systems specification can and will change, thereby presenting special challenges to the project manager.  Defining a Project?... High Degree of Activity – Especially during the execution stage, a project involves several hectic activities. Conflict – A project may be impacted by competing activities with respect to resource needs or management focus. Life Cycle – A project has different phases and is completed in stages  Defining a Project?... High level of uncertainty & risk – As a result of its uniqueness, dependency on other agencies and its relatively long-term nature; a project is faced with a lot of uncertainty and risk Teamwork/multi-skill – Projects require a team of people with different skills to get the job done  Project Mgt. VS General Mgt. Proj. Mgt General Mgt Each Project Management has Routine work its own special characteristics Open ended time for operation different from other project Gradually bringing changes Specific time frame Operating regularly Resulting in changes (big or Every objective weighed equally small scale of changes) within in order to maintain status quo specific time frame Rather permanent team work Not regular in operation Each project objective weighed differently depends on expected changed the project will deliver Temporary project team work 19-Dec-24 27  Project Manager Project Manager is a person who assists/supports, facilitates, coaches, monitors/follows up and evaluate the operation of the project in order to ensure a success of deliveries in responding to each project objective according to the identified timeline and resources. 19-Dec-24 28  Key Roles of Project Manager:  Project planning  Budgeting  Staff/team building  Work plan formulation  Supervising and monitoring 19-Dec-24 29  Required Skills for Project Manager  Leadership skill  Managerial skill  Problem solving skill  Negotiating and coordinating skill  Inter-personal skill and team management  Risk mitigation and management skill 19-Dec-24 30  Project Vs program A project is normally originated from a plan which can be a national plan or corporate plan. In many cases the term project is used for what should be termed as program or work package. Some people use the term ‘project’ and ‘program’ interchangeably. However, there is a quite difference between the two. 31  Program Program in general is a groups of related projects that are managed in a coordinated ways to achieve certain objective. Any development plan can be considered as a program A program is thus, larger in scope, activity oriented not necessarily time bound and its objectives are broader 32  Program (Cont …) Example, The national goal: Poverty Eradication Strategy: Increase productivity ( in all sectors) Development program: Increase agricultural productivity This may result in a number of projects like, Construction of dams ( irrigation infrastructure) Upgrading the skill of agricultural practices Construction of training centers Health program may have a number of projects like, Construction of hospitals Training of health officers Expansion of health centres 33  Program and Projects hierarchy Plan : National, Regional or company plan with development target Program: Specific program within the frame of national or regional plan (health, education) Project: School project, Power plant or housing project Work Package : Water supply and distribution package, Power supply and distribution package Task: Award of water supply contract, Construction of foundation Activity 34  Types of Projects Basically three types of projects can be identified depending upon how new resources committed to them relate to existing economic activities. First the largest type of project, around which project analysis grew up, involves new investment New investments are designed to establish a new productive process independent of previous lines of production. They often include a new organization, financially independent of existing organizations. Secondly there are expansion projects which involve repeating or extending an existing economic activity with the same output, technology and organization.  Types of Projects… Thirdly there are updating projects which involve replacing or changing some elements in an existing activity without major change of output. Updating projects involve some change in technology but within the context of an existing, though possibly reformulated organization. With changing economic circumstances the balance between these types of projects may change.  Whatever type of project is being analyzed, the effect of using new resources has to be distinguished from the effect of existing operations. The incremental resource cost has to be identified, that is that will be committed in a project over and above what would otherwise have been used. Similarly the incremental benefits, the additional benefits over and above what would otherwise have occurred, have to be identified. Both incremental costs and incremental benefits have to be valued.  Classification of Project (further classifications) Revenue Vs capital project Project can come in many size and form. They may be very simple or complex. Major project types are two. These are, Revenue project: Are those which can be carried out within the normal organizational structure and normally will be completed within the a single accounting period. Capital Project: Are those which can not be carried out within the normal organizational structure and are normally stretched over a number of accounting periods. In practice many projects fall between these two broad categories 38  Classification of Project (cont …) Capital project always require considerable capital investment. The main feature of capital projects are,  They usually occupy considerable time  They usually employ huge capital investment As a result they do not fit readily into conventional organizational structure but cut across functional and time boundaries and thus, require an organizational structure particular to themselves. When we say project we are mainly referring to the capital projects. 39 Classification of Project (cont …) In general projects be it revenue or capital can be classified from different perspectives. a) On the basis of time horizon project can be Long term projects : Power plant project Medium term projects : Construction of a factory Short term project: Exhibition, trade fair 40 Classification of Project (cont …) b) On the basis of the type of output: Project producing tangible Products : Oil mill Project providing services: Telecom project, Education etc. c) On the basis of the scope of the project: International project : Euro tunnel project National Project: Eth Hydro power project Regional Project: Elementary school project d) Based on the economic sector: Agricultural project: Irrigation project Industry project : Cement Project Service sector project : Bank projects 41  Classification of Project (cont …) e) On the basis of technology: Capital intensive project : Brewery project Labour intensive project : Textile industry project f) Based on location : Rural Projects Urban project g) On the basis of the nature of the project Independent project : Hospital, Hydroelectric power Complementary project : Airport project, Run Way and airport services are different projects which are complementary to each other. 42  Project Parameters Five constraints operate on every project: Scope Quality Cost/ budget Time Resources These constraints form an interdependent set; a change in one can require a change in another constraint in order to restore the equilibrium of the project. In this context, the set of five parameters form a system that must remain in balance for the project to be in balance. They are so important to the success or failure of the project.  Project Parameters Scope Scope is a statement that defines the boundaries of the project. It tells not only what will be done but also what will not be done. In the information systems industry, scope is often referred to as a functional specification. In the engineering profession, it is generally called a statement of work. Scope may also be referred to as a document of understanding, a scoping statement, a project initiation document, and a project request form. Whatever its name, this document is the foundation for all project work to follow. It is critical that scope be correct. Beginning a project on the right foot is important, and so is staying on the right foot. It is no secret that scope can change. You do not know how or when, but it will change. Detecting that change and deciding how to accommodate it in the project plan are major challenges for the project manager.  Project Parameters Quality Two types of quality are part of every project: The first is product quality. This refers to the quality of the deliverable from the project. The traditional tools of quality control are used to ensure product quality. The second type of quality is process quality, which is the quality of the project management process itself. The focus is on how well the project management process works and how can it be improved. Continuous quality improvement and process quality management are the tools used to measure process quality. A sound quality management program with processes in place that monitor the work in a project is a good investment. Quality management is one area that should not be compromised. The payoff is a higher probability of successfully completing the project and satisfying the customer.  Project Parameters Cost The monetary cost of doing the project is another variable that defines the project. It is best thought of as the budget that has been established for the project. This is particularly important for projects that create deliverables that are sold either commercially or to an external customer. Cost is a major consideration throughout the project management life cycle. The first consideration occurs at an early and informal stage in the life of a project. The customer can simply offer a figure about equal to what he or she had in mind for the project. Depending on how much thought the customer put into it, the number could be fairly close to or wide of the actual cost for the project.  Project Parameters Time The customer specifies a time frame or deadline date within which the project must be completed. To a certain extent, cost and time are inversely related to one another. The time a project takes to be completed can be reduced, but costs increase as a result. Time is an interesting resource. It can’t be inventoried. It is consumed whether you use it or not. The objective for the project manager is to use the future time allotted to the project in the most effective and productive ways possible. Future time (time that has not yet occurred) can be a resource to be traded within a project or across projects. Once a project has begun, the prime resource available to the project manager to keep the project on schedule or get it back on schedule is time. A good project manager realizes this and protects the future time resource jealously.  Project Parameters Resources Resources are assets, such as people, equipment, physical facilities, or inventory, that have limited availabilities, can be scheduled, or can be leased from an outside party. Some are fixed; others are variable only in the long term. In any case, they are central to the scheduling of project activities and the orderly completion of the project.  Examples showing lack of Planning 1. A sanitation project is started because people are dying of diarrhea. But people believe that diarrhea is caused by evil spirits. Why does the project fail? 2. An agricultural project wants to help very poor people. An agriculturalist starts a program of vegetable growing. While the project is technically very successful, very poor people do not benefit because they have no land. Why does the project fail? 3. A fisheries project digs ponds, but they do not hold enough water because the soil does not contain enough clay. Why does the project fail? 4. A microfinance project is launched to help women engage in IGAs by giving access to credit without detailed analysis of the intra-household power relations. What may cause such projects to fail?  Causes of Project Failure Projects often fail for the following reasons: 1. Only the project team is interested in the end result. 2. No one is in charge. 3. The project plan lacks structure. 4. The project plan lacks detail with respect to all the management functions and tools. 5. The project is under-budgeted. 6. Insufficient resources are allocated. 7. The project is not tracked against its plan. 8. The project team is not communicating. 9. The project strays from its original goals.  Most large-scale programs or projects do not succeed, mainly driven by inadequate governance and poor planning Large Programs/Projects Success Rates Successful 16% 53% 31% Cancelled Under Perform Source: Standish Group International, Survey from 2500 personnel attending project management training  Why Projects / Programs Fail Others Poor Organization Technical Problems and Project 11% Management 4% Problems with Suppliers Practices 4% 36% Insufficient Project Personnel Resources 10% 15% 20% Ineffective Project Planning Poorly Defined or Missing Project Objectives Source: Standish Group International, Survey from 2500 personel attending project management training  What is Project Management? It is the application of knowledge, skills, tools and techniques to project activities to meet project requirements. It’s a process of managing resources in such a way that a project is completed within defined scope, quality, time, and cost constraints. Applying both the science and art to planning, organising, implementing, leading and controlling the work of a project to meet the goals and objectives of an organisation. The process of defining a project, developing a plan, executing the plan, monitoring the progress against the plan, overcoming obstacles, managing risks, and taking corrective actions. The process of managing the competing demands and trade-offs between the desired results of the project (scope, performance, quality) and the natural constraints of the project (time and cost ). The process of leading a team that has never worked together before to accomplish something that has never been done before in a given amount of time with a limited amount of money.  Projects & Risks Project managers manage projects in uncertain situations. Project risk: the likelihood of the occurrence of an uncertain event, usually a negative one that may adversely affect the successful completion of a project. Unlike uncertainties, likelihood of occurrence can be attached to risks Project risk indicates that projects travel through rough roads. This makes the field of project mgt very distinct and requiring competitive knowledge, skills, tools and techniques. In many cases, project management may spend much time in an attempt to adapt to unpredicted change.  Areas of Expertise Project Management Involves Project management involves knowledge, tools, techniques and skills that are unique to it, – E.g. Work breakdown structures, PERT It requires understanding and use of knowledge and skills from at least five areas of expertise. These are: – The project management body of knowledge – Application area knowledge, standards and regulations – Understanding the project environment – General management knowledge and skills – Interpersonal skills.  Areas of Expertise a Project Team Needs. General Management Understanding Knowledge and the Project Skills Environment Project Management Body of Knowledge Application Area Interpersonal of Knowledge Skills CHAPTER 2:THE PROJECT LIFE CYCLE  Learning objectives  Describe What Project Life Cycle means and the related management practices needed  Understand different models of Project life cycles. 1. Baum project life cycle; 2. UNIDO project life cycle;  Describe different phases and different stages of project life cycle. 1 CHAPTER 2:THE PROJECT..  Definition: project life cycle refers to the various stages through which a project passes from time of its inceptions up to its implementation and realization of the objectives.  There are many models which differ in their perspective, emphasis and level of detail. 2 Project life cycle….  But, there are main features of project life cycles which are common for all models.  information gathering  analyzing the information  decision making 3 Project Life Cycle….  The Most common Models are: 1. The Baum Cycle 2.UNIDO Project Life Cycle 4 The Baum Cycle (World Bank 1970)  It is a traditional approach.  It included four major components in linear progression:  identification → preparation → appraisal → implementation.  This traditional project cycle emphasis top down approaches to development project planning.  In 1978 Baum revised his formulation of the project cycle and included a fifth component, evaluation. 5 1.The Baum Cycle… Identification Preparation Evaluation Implementation Appraisal 6 1.The Baum Cycle…  Community participation in all aspects of project was marginalized.  Individuals were considered as mere recipients of orders and benefits,  The projects were facing implementation problems, and could not be sustained, if ever implemented as planned. 7 2. New Project Cycle  During 1994 the World Bank changed its approach:  from top down planning to bottom up, emphasized the need for beneficiary participation in project planning.  But, what level of beneficiary participation is required?  According to the new project cycle (World Bank 1994), project cycles have four phases: Listening to the stakeholders Piloting the project Demonstrating Mainstreaming the project 8 2. UNIDOApproach 1. Pre –investment phase The major activities are:  Identification of investment opportunities ( opportunity studies )  Analysis of project alternatives and preliminary project selection  Project preparation (pre feasibility and feasibility studies).  Project appraisal and investment decision (appraisal report) 2. Investment phase The major activities are:  Negotiation and contracting  Engineering design  Construction  Production marketing  Training  Commissioning and start up 3. Operational phase The major activities are:  Expansion and innovation  Replacement and rehabilitation 9 10 3. UNIDOApproach…  The diagrams are oversimplified, in reality, the cycles and the stages are not discrete but continuous and iterative.  There is a possibility of referring back and forth.  there are several activities undertaken in more than one phase and the transfer is very slow and gradual.  The output of the first cycle can be considered as input of the next cycle and help as feedback to consider the former one.  All phases of the project cycle lend themselves important consultancy from different disciplines and expertise.  Not all projects should necessarily pass through all stages described in the diagram. 11 1.The pre –investment phase  Identification of project idea and opportunity studies  What is Identification?  Project ideas may originate from various sources with the aim of: 1. National and sectoral plans (main source?) 2. Overcoming the constraints to the national development efforts, and/or 3. Meeting unsatisfied needs and demands for goods and services. 12 The pre –investment phase…  Sources of project ideas  Depending on the level of details, project ideas can be categorized as;  Macro Level  Micro Level 13 Where the project Ideas come from… Opportunities are spawned in: – changing circumstances – chaos – confusion – inconsistencies – lags or leads – knowledge and information gaps – vacuums in industry or markets 14 Where the project Ideas come from 1. Look for opportunities in the following:  things that ‘bug’ you’  things that bother others or stop people from doing what they want, when they want,and the price they want;  new advances in science and technology;  look for problems that need to be solved;  changes in our world whether those changes be in:  demography  society  technology  science  politics  etc. 15 2. Monitoring The Environment: Economic Sector – State of the Economy – Overall Rate of Growth Growth Rate of Primary, Secondary and Tertiary Sectors – Cyclical Fluctuations – Linkage with the WorldEconomy Trade Surplus / Deficit – Balance of Payment Situation 16 2. Monitoring The Environment... Governmental Sector – Industrial Policy – Government Programmes & Projects – Tax Framework – Subsidies, Incentives and Concessions – Import & Export Policies – Financing Norms – Lending Conditions of Financial Institutions and Commercial Banks 17 2. Monitoring The Environment... Technological Sector – Emergence of NewTechnologies – Access toTechnical Know-How, Foreign as well as Indigenous – Receptiveness on the Part of Industry 18 2. Monitoring The Environment... Socio-Demographic Sector – PopulationTrends – Age and sex shifts in Population – Income Distribution – Educational Profile – Employment ofWomen – Attitudes Towards Consumption and Investment 19 2. Monitoring The Environment... Competition Sector – Number of Firms in the Industry and the Market Share of the TopFew – Degree of Homogeneity and Differentiation Among Products Entry Barriers – Comparison with Substitutes in Terms of Quality, Price, Appeal and Functional Performance – Marketing Policies and Practices 20 2. Monitoring The Environment... Supplier Sector – Availability and Cost of Raw Materials and Sub-Assemblies – Availability and Cost of Energy – Availability and Cost of Money 21  PRELIMINARY SCREENING Compatibility with the Promoter – It Fits the Personality of the Entrepreneur – It is Accessible to Him – It offers him the Prospect of Rapid Growth and High Return on the Invested Capital 22  PRELIMINARY SCREENING...  The Process - is like a funnel! Creative / Soft-Thinking (Right Brain) - brainstorm new product innovations Logical / Hard-Thinking (Left Brain) - formal business planning (opportunity screening,market forecasts, financial forecasts) 23  PRELIMINARY SCREENING... Consistency with the Government Priorities – Is the Project Consistent with the National Goals and Priorities? – Are there any Environmental Effects Contrary to Governmental Regulations? – Can Foreign Exchange Requirements of the Project be EasilyAccommodated? – Will there be Any Difficulty in Obtaining the License of the Project? 24  PRELIMINARY SCREENING... Availability of Inputs – Are the Capital Requirements of the Project within Manageable Limits? – Can Technical Know-How Required for the Project be Obtained? – Are the Raw Material Required for the Project Available Domestically at a Reasonable Cost? If the Raw Materials Have to Be Imported,Will there be Problems? – Is the Power Supply for the Project Reasonably Obtainable from External Sources and Captive Power Resources 25  PRELIMINARY SCREENING... Adequacy of Market – Total Present Domestic Market – Competitors and Their Market Share – Export Markets – Sales and Distribution System – Projected Increase in Consumption – Barriers to the Entry of New Units – Economic,Social and DemographicTrends Patent Protection 26  PRELIMINARY SCREENING... Reasonableness of Cost – Cost of Material Inputs – Labour Costs – Factory Overheads – General Administrative Expenses – Selling and Distribution Cost – Service Cost – Economies of Scale 27  PRELIMINARY SCREENING... Acceptability of Risk Level – Vulnerability of Business Cycles – Technological Changes – Competition from Substitutes – Competition from Imports – Governmental Control Over Price and Distribution 28 Pre feasibility studies  The principal objectives of pre feasibility study are to determine whether: All possible project alternatives have been examined ; The project concept justifies a detailed analysis by a feasibility study 29 Pre feasibility studies …  Pre feasibility study is an intermediate stage between a project opportunity study and a detail feasibility study,  the difference being in the degree of detail of the information obtained and the intensity with which project alternatives are discussed. A well prepared and comprehensive opportunity study may justify bypassing the pre feasibility study stage. 30 Project preparation –Feasibility study  Should provide all data necessary for an investment decision.  The commercial, technical, financial, economic and environmental assessment is perquisites for an investment project.  Therefore these aspects need to be defined and critically examined on the basis of alternatives solutions already reviewed in the pre- feasibility study. 31 Appraisal – appraisal report  A comprehensive and systematic assessment of all aspects of the proposed project.  project appraisal is made at higher level in more broad prospective.  At the early stages of project cycle, project evaluation criterion are manly but not only, technical and micro-economic in character. 32 Appraisal – appraisal report…  At this stage, the project will be evaluated in depth in terms of macro-economy, sectoral and non-economic.  the project should be reviewed and revised to confirm that it accords with broad development objectives and fits into development strategy of the country.  This means the framework within which a project is appraised is broad and multifaceted. 33 Appraisal – appraisal report…  to ensure that the project represents high-priority use of the country’s resources.  To this end, the following questions are relevant: Does the project belong to a sector where the country needs additiona investment? Does the project meet the urgent needs of the sector? Does the project represent the least-cost alternative? Is the project of optimum size (not too big or too small)? Is the timing of the project right? Is the project well designed with reasonably accurate cost and benefit estimates? If the proposed project is not implemented, what other opportunities do exist to use the same resources? 34 Appraisal – appraisal report…  Upon completion of the appraisal, a report is prepared endorsing recommendations of approval, reformulation, postpone or outright rejection of the proposed project. 35 2. Investment phase  Implementation  After go a head decision is received, inter organizational linkage is updated and project office inset up.  The major activities in this phase are:-  Revising the feasibility study in case the estimated and forecasts in the feasibility study becomes out-dated due to long delays.  Preparations of tender documents and invitation of bids for different supplies.  Receiving responses to bid invitations and evaluating the documents. 36 2. Investment phase …  Negotiation and contracting,  On the bases of the negation results, signing contract with all the organizations selected to be involved in the executions of the project.  Engineering design,  Acquisition of land and construction – site preparation, construction of building and civil works, erection and installation of machineries and equipment.  Preproduction marketing – promotional campaigns before production. 37 2. Investment phase …  During implementation, careful programming, close control of cost, time and quality and regular reporting is indispensable for the success of the project.  Careful programming is required in order to avoid any delay or gaps in supply of critical materials required for smooth implementation. 38 2. Investment phase …  the implementation report should re-estimate the financial and economic returns of the project on the basis of actual costs and update the information on the expected operating costs and benefits.  At the end, project commissioning is undertaken.  Commissioning is usually brief but technically critical span in project cycle.  It links the implementation with operation and demonstrates the degree of effectiveness of project planning and execution.  Commissioning includes individual unit testing, start-up(system operation), and performance trial as appropriate. 39 3. Operational Phase  Operation:  It involves integrations of management and assets and running and maintaining the new economic entity in accordance with planned objective.  What has been planned and physical setup is gradually translated into output of goods and services. 40 3. Operational Phase…  At this point:  top, middle and supervisory management groups are brought together and placed in positions;  reliable arrangements are made for steady flow of critical inputs;  reliable marketing outlets and distribution channels are established;  regulations and procedures for personnel, financial and material management are set up, and put in to practice;  adequate working capital is provided and maintained etc. 41 3. Operational Phase…  This stage is concerned with operational management, a problem hidden area, filled with a long list of failures and disappointments.  The problems of operation may be considered from both short and long-term view points.  Short tem problems such as application of the production techniques, operation of equipment or inadequate labor productivity owing to lack of qualified staff and labor are common. 42 3. Operational Phase…  The long-term view relates to chosen strategies and the associated production and marketing costs as well as sales revenue (as appropriate).  These have a direct relationships with projections made during the project feasibility study.  If these projections and estimations are proved to be irrelevant, any remedial action should be taken although it could be expensive. 43 3. Operational Phase…  To handle such problems, set up a strong management with appropriate structure, capable of adapting and reshaping schemes to accommodate rapidly changing circumstances.  A visionary and experienced management is needed to make right decisions at right times concerning the following activities :  Replacement and Rehabilitation,and  Expansion and Innovations. 44 Ex-Post Evaluation  to assess whether the, objectives of the original project have been attained, and if not why ?.  For this purpose the nature magnitude and timing of the envisaged benefits specified in the feasibility study is used as standards to measure the actual achievements.  Physical performance assessment (impact evaluation) the most difficult evaluation! 45 Ex-Post Evaluation…  Physicalperformance assessment is not easy and straight forwarded as that of financial auditing mainly due to: Evaluating systems might not properly designed during the feasibility study.  Delay and missing of completion and progress reports.  Lack of institutional evaluation procedures. Impact assessment by its very nature is not straight forward since many factors may influence a given variable at a time. This calls for controlling for others variable to effectively assess the effect of the project separately. 46 Chapter Three: Project Management Structures/ Leadership  Introduction  Once management approves a project then the question becomes, how will the project be implemented? The different project management structures used by firms to implement projects are: Functional (divisional) organization, dedicated project teams, and matrix organization  1. Functional (Divisional) Organization organizing projects within the existing functional hierarchy of the organization. Coordination is maintained through normal management channels. Example, a tool manufacturing firm decides to differentiate its product line by offering a series of tools specially designed for left-handed individuals. Top management decides to implement the project, and different segments of the project are distributed to appropriate areas as follows:- The industrial design department - modifying specifications The production department - devising the means for producing new tools The marketing department - gauging demand and price The overall project will be managed within the normal hierarchy, with the project being part of the working agenda of top management.  Adva. and Disadv. of functional organization No Change, Flexibility In-Depth Expertise Easy Post-Project Transition  Disavd.  Lack of Focus  Poor Integration  Slow  Lack of Ownership  2. Organizing Projects as Dedicated Teams- project team organization Creation of independent project teams. full-time project manager is designated to pull together a core group of specialists who work full time on the project. It is simple, Fast and Cohesive Team Structure: The use of teams as the central device to coordinate work activities. Characteristics: Breaks down departmental barriers. Decentralizes decision making to the team level. Requires employees to be generalists as well as specialists. Creates a “flexible bureaucracy.”  3. Organizing Projects within a Matrix Arrangement- matrix organization A structure that creates dual lines of authority and combines functional and product departmentalization Matrix management is a hybrid organizational form. There are usually two chains of command, one along functional lines and the other along project lines.  Matrix Structure:. Key Elements: + Gains the advantages of functional and product departmentalization while avoiding their weaknesses. + Facilitates coordination of complex and interdependent activities. – Breaks down unity-of-command concept. Project Negotiated Functional manager issues Managers What has to be Who will do How will it be done? the task? done? When should Where will the How will the the task be done? task be done? project involvement How much Why will the impact normal money is task be done? functional available to do activities? the task? Is the task satisfactorily How well has How well has completed? the functional the total project input been been done? integrated?  Kind of matrixes Weak matrix- project manager responsible for coordinating project activities. The project manager basically acts as a staff assistant. Balanced matrix- project manager is responsible for defining what needs to be accomplished. Strong Matrix - This form attempts to create the "feel' of project team within a matrix environment. The project manager controls most aspects of the project, including scope trade-offs and assignment of functional personnel.  Choosing the Appropriate Project Management Structure Organization Considerations- how project is important, percentage, resource availability. Project Considerations-how much autonomy the project needs in order to be successfully completed. Example: size, budget, time etc  Chapter Four: Project Appraisal Process 4.1. Project initiation/identification/PI I. Development project identification / initiation The first phase of the Project Cycle Management (PCM) Four analyses: situation analysis, feasibility study, PI stakeholder analysis, and problem analysis. A process of collecting and analyzing of secondary and primary data Feasibility Stakeholder Problem Situation Analysis Study Analysis Analysis Why is PI important to Project Cycle Management (PCM)? Understand Identify problem context and for project situation formulation Know whom to Foundation of PCM work with 14  How to ensure effective obtaining information for PI? Government’s reports Research Institutions’ reports Secondary data review UN/NGOs’ reports Universities’ researches  Cont… Government Community members Primary data collection Donors Relevant Institutions  Cont… Primary Data Collection Methods Semi-Structure interview Focus Group Discussion Survey Meeting Workshop A. What is Situation Analysis? A primary assessment of a particular situation A scoping and analyzing process of internal and external factors A process of identifying problems and needs 18  4. How to conduct Situation Analysis? Identify geographic Step 1 Scan or assess external factor and Step 2 environment Analyze internal factor Step 3 Select and conceptualize the Step 4 information 19 Relevant tools can be used to do Situation Analysis External PESTLE Factor Tools Internal SWOT Factor 20  B. What is Feasibility Study? A feasibility study is designed to provide an overview of the primary issues related to a project idea. A feasibility study looks at the viability of an idea with an emphasis on identifying potential problems and attempts to answer one main question: will the idea work and should you proceed with it?  How to conduct feasibility study Relevant techniques, can be used to conduct a Feasibility Study: Rapid Rural Appraisal (RRA) Participatory Rural Appraisal (PRA)  Rapid Rural Appraisal (RRA) The basic idea of RRA is to rather quickly collect, analyze and evaluate information on rural or community conditions and local knowledge. Some tools of RRA Secondary Data Review Workshop Semi-Structured Interview  Participatory Rural Appraisal (PRA) A family of approaches, methods and behaviors that enable people to express and analyze the realities of their lives and conditions, to plan themselves what action to take, and to monitor and evaluate the results. Its methods have evolved from Rapid Rural Appraisal (RRA). PRA has been used in natural resources management, agriculture, programs for the poor, health and food security, HIV/AIDS awareness and action, establishing land rights of indigenous people, slum development, disaster management, negotiation and conflict resolution, adult literacy  Some of PRA tools Village map, Seasonal calendar Venn diagram wealth (well-being) ranking  Village Map: helps find out who lives where by drawing with the people in the village a village social map. shows the different social structures such as households, health centers, schools, and other major institutions found in the area Example of village map  Seasonal Calendar A visual method of showing the distribution of seasonally varying phenomena such as economic activities, natural resources or problems, production activities, illness/disease, and migration over a period of time. Example of seasonality calendar  Venn Diagram It can be used To identify who participates in local organizations, institutions and groups, by gender, wealth and other criteria. To understand how the different organizations, groups and people relate to one another in terms of contact, cooperation, flow of information, provision of services, and so on. A Venn diagram shows a perception of a community and institutions who work in that community  Wealth (well-being) Ranking A tool or method used for collecting and analyzing data on perceptions of wealth differences and inequalities in a community and for identifying and understanding local indicators and criteria of wealth, well-being, and poverty provide a quick understanding on social characteristics and assets of community members who are well-off, better-off, poor, and very poor C. What is Stakeholder Analysis? A process of assessing of key stakeholders’ interest and level of influence A process of assessing of impacts the involved stakeholders may have on the project 30  3. Why Stakeholder Analysis is important? Increases interests and Identify relationship among ownership among various stakeholders stakeholders Understand politic and power Project team to make right dynamic between different decision for a project stakeholders 31  4. How to conduct Stakeholder Analysis? Identify relevant individuals and institutions or groups Identify stakeholders Analyzing stakeholders Mapping stakeholders Prioritizing stakeholders 32  Recommended tool to be used 1. Stakeholder Identification Framework Stakeholders Groups or individuals 1. Primary Stakeholders Staff Donors 1. Secondary Stakeholders Local government Social media 33  Recommended tool 2. Stakeholder Interest Analysing Framework to be used Stakeholders Stakeholders’ Project’s impacts on Stakeholders’ Stakeholders’ interests stakeholders impacts/ attitudes 1-5 influences on project 1-5 1-5 1-5 Primary Stakeholders Staff (5) (5) (4) (5) They have direction They can improve They are able to They behave decision their living condition make project positively toward the achievable project 34  Recommended tool 2. Stakeholder Interest Analysing Framework to be used Stakeholders Stakeholders’ Project’s Stakeholders’ Stakeholders’ attitudes interests impacts on impacts/ 1-5 stakeholders influences on project 1-5 1-5 1-5 Secondary Stakeholders Local (4) (3) (4) government They are supposed The project is -Their cooperation is -Commune and district to serve their complementary important as it can authorities have better people to their roles promote sustainability cooperation with and -At the same time, communities people, responsibilities they can be the -Provincial and national obstacle levels mostly do not want to support community people movement 35  Recommended tool to be used 3. Stakeholder Mapping Framework Stakeholders Alignment with project 1-5 (1 not at all, 5 is the strongest) Project objective 1: to develop capacity of women on leadership Staff 5 Local government 4 Project objective 2: to enhance capacity of local government officials Donors (depending on result in stakeholder interest analysis) Social Media (depending on result in stakeholder interest analysis) 36  Recommended tool to be used 4. Stakeholder Prioritizing Framework Stakeholders Level of involvement with project 1-5 (1 not at all, 5 is strongest) Project objective 1: to develop capacity of women on leadership Staff 5 Local government 4 Project objective 2: to enhance capacity of local government officials Donors (depending on result in stakeholder interest analysis) Social Media (depending on result in stakeholder interest analysis) 37  D. Problem Analysis  It identifies the negative aspects of an existing situation and deals with present  It is often the first step that can help to find solutions by analyzing and mapping out the relationship of causes and effects around a main problem or issue Recommended tool for Problem Analysis: Problem Tree Analysis  Problem tree analysis examines the negative Effects aspects of an existing situation and establishes the ‘cause and effect’ Main Problem relationships between Causes the identified problems. 39  Recommended tool for Problem Analysis: Problem Tree Analysis Example of a Problem Tree Analysis Have great difficulty in presenting achievements of the organization Branch: effect Trunk: main problem Very late in producing the annual report Team members Annual report Annual report writing Roots: causes have high work writing is not is not included in the overload prioritized annual work plan 40 II. Industrial project idea identification Sources of idea:  Macro Level  Micro Level Project ideas may originate from various sources with the aim of: 1. National and sectoral plans (main source?) 2. Overcoming the constraints to the national development efforts,and/or 3. Meeting unsatisfied needs and demands for goods and services 4.2.1 Pre-feasibility and feasibility studies (Independent study)  4.2.2. PROJECT PREPARATION Formulations/Feasibility studies After Identifying promising project idea the next step is project preparation or developing the idea into project and analyzing it further. Project preparation is also referred to as project design, project formulation, or project write-up presented to funding agency. Project formulation ( preparation) involves the analysis of a number of factors like,  Market Analysis and Marketing  Technical analysis  Financial Analysis of Investment projects  Economic, social and Environmental Analysis Of Investment projects Market Analysis and Marketing The process is comprised of analyzing the existing or potential market for the project's output and  then developing a marketing strategy and a marketing programme to carry out the strategy.  Market Analysis and Marketing Objectives of Market Analysis  The specific objectives of the market analysis are to know:-  the market size and the growth rate  The volume of output the project plans to produce and sell in light of the competition  The geographic or sectoral markets the project’s product is expected to compete  The method of distribution and marketing policy  Market Analysis and Marketing Collection of Demand Secondary Forecasting Information Situational Characterization of Analysis and the Market Specifications of Objectives Conduct of Market Planning Market Survey Steps in Market and demand analysis  Market Analysis and Marketing 1. Market/Situational Analysis and Specifications Of Objectives  This analysis is used in order to get general picture and basic information about the industry and /or the sector in general.  In this analysis the project analyst may informally talk to  Customers,  Competitors, (in case of business project)  Middlemen,  and others in the industry (sector )  Market Analysis and Marketing 2. COLLECTION OF SECONDARY INFORMATION  It provides the base and the starting point for market and demand analysis  It indicates what is known and often provides leads and clues for gathering primary information required for further analysis  Sources of information are  General Sources of Secondary Information  Industry Specific Sources of Secondary Information  Evaluation of Secondary Information  Although economically and readily available careful examination in terms of reliability, accuracy, and relevance for the purpose under consideration is essential.  Market Analysis and Marketing 3. CONDUCT OF MARKET SURVEY  The important types of information to be gathered through the market survey include:-  Total demand and rate of growth  Demand in different segments of the market  Motives for buying  Purchasing plan & intentions  Satisfaction with existing products  Unsatisfied needs  Attitudes towards various products etc  Market Analysis and Marketing 4. CHARACTERISATION OF THE MARKET  Based on the secondary and primary data gathered, the market for the product or service can be described in terms of the following aspects. :- A. Effective Demand in the Past and Present: This is measured by the actual consumption level Production + Imports – Exports – Change in stock level B. Breakdown of Demand: In order to get a better picture about demand it is better to breakdown the entire market into demand of different segments of the market.  Income group  Geographic Location  Sex  Age category  Market Analysis and Marketing C. Prices: Price analysis is important in order to distinguish different types of prices like, – Manufacturing price – Whole sale price – Retail price D. Methods of distribution: method of distribution varies with the nature of the product.  This analysis involves examining the available method of distribution that can be considered.  That is, the market is characterized in terms of the availability and nature of distribution. E. Suppliers: The market need to be characterized in terms of supply of similar products.  Sources and Location of suppliers  Present capacity and Planned expansion (if any)  Problems in production  Cost consideration ( if possible) F. Government policy: The market is characterized in terms of the prevailing government policy regarding the market.  Market Analysis and Marketing 5. DEMAND FORECASTING A. Qualitative Methods  These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates  Used to generate forecasts if historical data are not available (e.g., introduction of new product).The important qualitative methods are: I. Jury of Executive Method II. Delphi Method B. TIME SERIES PROJECTION METHODS  These methods generate forecasts on the basis of an analysis of the historical time series.  The important time series projection methods are: I. Trend Projection Method II. Exponential Smoothing Method III. Moving Average Method C.. CASUAL METHODS  Casual methods seek to develop forecasts on the basis of cause-effects relationships specified in an explicit, quantitative manner. Simple and Multiple Regression  Market Analysis and Marketing  The output of the market analysis, for a commercial project, should of a set of forecasts of the following variables for the duration of the project:  Quantities of the expected sales and prices for goods to be sold in the competition regardless of whether such sales are made for domestic or foreign customers  Quantities of expected sales and prices for goods to be sold domestically and not in competition with internationally traded goods  Sales taxes and export taxes that are expected to be paid by the consumers of the traded goods  Sales taxes to be paid on goods not traded internationally  Subsidies to be received on the basis of production, sales, exports etc..  Government regulations (such as price ceilings and floors, or quotas) affecting the sales or price of the output  Market Analysis and Marketing 6. Marketing plan To enable the product to reach a desired market segment a suitable marketing plan should be developed. The marketing plan has the following components: Current market situation  The size of the market and customer buying behavior  Competitive situation Distribution situation Macro environment Opportunity and issue analysis Objective Marketing strategy  Target segment  Product positioning  Product line  Price  Distribution  Promotion activity Action plan (market program)  Technical analysis Product Material analysis Inputs EIA Sales Production program Technology programs and schedule, Plant selection capacity Equipment Production Planning selection, cost process production estimates engineering process Human resources, Location and Implementation plant organization site, Preliminary schedule and overhead costs Facilities layout The technical design process  Technical analysis Generally, the technical analysis is primarily concerned with Material inputs and utilities Manufacturing process and technology Product mix Plant capacity Location and site Machines and equipment Structure and civil works Project charts and layouts Work schedule  Financial Analysis of Investment projects Financial analysis of an investment project provides the "bottom line" for investors, a prediction of what the project holds in store in terms of financial benefits and costs. The primary purpose of doing a financial analysis of a project is to evaluate the project’s profitability or cost-effectiveness relative to some alternative project or investment. Or , the results of the financial analysis are used to compare alternative projects to select which ones should be implemented  is linked to the 1. analysis of markets that provide an idea of revenues (benefits) that can be generated, and 2. technical analysis that provides an idea of the necessary investment and operating costs  Financial Analysis of Investment projects Time (Economic Life Converted of the project) Liquid into fixed & Utilization Results resources Current 0 mobilized assets of Assets 1 2 P Generation 3 Cost of r of cash 4 Capital o inflows over time – 5 j committed 6 e resources 7 c 8 COSTS t BENEFITS Total Investment System Net cash flows + 9 ≤ + expected Residual value of 10 service charges. assets Financial Costs and Benefits  Financial Analysis of Investment projects Cost analysis: Cost analysis is composed of two components:  Initial Investment Costs and Operation Costs FIXED INVESTMENT COSTS include:  Land and Site development FIXED ASSETTS  Building and civil works =  Machinery and equipment FIXED INVESTMENT COSTS  Lump-sums for patents and know-how PRE-OPERATION EXPENDITURES include: + - Administrative and legal fees PRE-OPERATION - Salaries for personnel during the implementation EXPENDITURES - Travel expenses - Training costs - Interests on loans during the implementation - Insurance costs during the implementation - Trial runs, start-up and commissioning NET NET WORKING CAPITAL = Current assets (inventories, accounts receivable and WORKING cash) – Current liabilities (accounts payable CAPITAL  Financial Analysis of Investment projects Operation Costs  Operation costs should be calculated as total annual costs (if the financial coverage is on yearly basis) starting from the first year of operation of the project and should include: – costs for inputs and supplies – royalties for use of technology – overhead costs – labor costs (including on-the-job training)  Financial Analysis of Investment projects Estimation of sales and production  The starting point for profitability projection is an estimation of production and sales. This helps to estimate potential revenue of the project estimating sales revenue the following issues should be considered  It is advisable not to assume a high capacity utilization level in the first year of operation.  This is because, even for simple technology and with no technical problem, firms may face other constraints like, Raw materials, Limited power supply, Marketing problem And other unexpected constraints  Gradually the level is increased year by year and at third and fourth years of operation the full capacity utilization can be assumed.  It is not necessary to make adjustment for stock in the first year of operation. That is, it is better to assume that production = sales  Selling price considered should be realistic and the price considered should be on the basis of the current price  Financial Analysis of Investment projects The cost of production Given the estimated level of production, the cost of producing the estimated amount can be worked out The major components of cost of production are:  Material Cost: These costs are comprise of the cost of raw materials  Utilities cost: consisting of power, water, and fuel are production cost components  Labor cost: this is the cost of all manpower employed in the farm.  Overhead cost: the expense on repairs and maintenance, rent, taxes, insurance on firm’s assets, etc. are collectively referred as farm overheads  Other costs  Financial Analysis of Investment projects Financial analysis is a process of evaluating an investment proposal. It is comprised of the following elements: A. Cash-Flow Table: Shows the INFLOW and OUTFLOW of cash through a period of time  The financial cash flow of a project is  the stream of financial costs and benefits, or  the stream of expenditure and receipts that will be generated by the project over its economic life.  The project cash flows are defined with the help of inputs (information) provided by marketing, production, engineering, costing, purchasing, and other departments. The cash flow of a project usually has:  The initial investment: represents the relevant cash outflows when the project is set up.  The operating cash inflows: are the cash inflows that arise from the operation of the project during its economic life.  The terminal cash flow: is the relevant cash flow occurring at the end of the project life on account of liquidation of the project  Financial Analysis of Investment projects  Financial cash flow lists the difference between receipts and expenditures against the years of project life.  Usually the net financial cash flow is negative in the first years of the project’s life, while in later years it becomes positive. Year 0 1 2 3 4 5 6 7 8 9 10 Receipts 1.0 2.0 2.0 1.0 2.0 2.0 2.0 2.5 Expenditures 1.0 2.0 2.5 0.6 0.4 0.4 3.0 0.4 0.4 0.4 0 Net (R-E) -1.0 -2.0 -2.5 +0.4 +1.6 +1.6 -2.0 +1.6 +1.6 +1.6 +2.5  Thus, in estimating the future cash flow of a project, adequate care should be taken to minimize biases, which may lead to over-estimate or under statement of project profitability  Financial Analysis of Investment projects Basic principles of measuring project cash flow a) Incremental principle  The cash flow of the project must be measured in incremental terms. To determine a project’s incremental cash flows a project analyst has to look at what happens to the cash flows of the firm with the project and without the project The difference between the two reflects the incremental cash flows attributable to the project Project cash flow from the Cash flow for the firm less Cash flow for the firm time period t with the project at time at time period t without the period t project equals b) Post -tax principle  The cash flow should be measured on an after tax basis. Some people ignore taxes and will try to compensate by discounting pre-tax cash flows at the rate which is higher than the cost of capital of the firm.  Actually there is no reliable mechanism that enable to make such adjustment. Tax payments like other payments must be properly deducted in deriving the cash flows. Thus, cash flows must be defined in post tax terms.  Financial Analysis of Investment projects B. Income Statement: Shows the Revenues and Expenditures for a period of time. REVENUES Sales revenue + Other revenues + EXPENDITURES Cost of goods sold - Administrative costs - Gross Profit (profit before tax) (- / +) Net Taxes NET PROFIT.  Financial Analysis of Investment projects c. Balance Sheet: Shows the ASSETS and the LIABILITIES at a certain period of time ASSETS LIABILITIES Liquid assets Short term Liabilities Cash at Bank Accounts Payable Bonds and stocks Short Term Credits Inventories Fixed Assests Long Term Liabilities Building Loan Mechinery = Owner’s Equity  Financial Analysis of Investment projects METHODS OF PRIORITISING/ appraisal/ PROJECTS Several different financial criteria have been proposed for comparing different projects.  Non-Discounted Measures  Ranking by Inspection  Payback period  Peak profit period  Average profit  Discounted Measures  Net Present Value  Net Present value Ratio  Benefit–cost Ratio  Internal Rate of Return  Financial Analysis of Investment projects Non-discounting methods  The non-discounted criteria will not in general take into account the time value of money. There are different methods under this category 1. Ranking by Inspection  By simple inspection it is possible to determine which of the two or more investment projects is more desirable.  There are two cases under consideration  When two projects have identical cash flows but different project life, i.e., One has shorter life while the other has longer project life  then, the project with the longer life would be more desirable.  When two projects have the same initial outlay the same earning life and earn the same total proceeds (profits), but one project has more of the flow earlier in the time sequence,  Then we choose the project having higher proceeds in the earlier period than later.  Financial Analysis of Investment projects Ranking by Inspection Consider the following example Net cash proceeds per year Investment (project) Initial cost Year I Year II A 10,000 10,000 --- B 10,000 10,000 1,100 C 10,000 3,762 7,762 D 10,000 5,762 5,762 Financial Analysis of Investment projects Ranking by Inspection  From the above table, comparison of project A and B  Investment B is better than investment A, since all things are equal except that B continues to earn proceeds after A has been retired.  More analysis is required to decide between C and D.  Investment D is more profitable than investment C, since D earns 2000 more in year 1 than investment C, which does not make up the difference until year two.  Financial Analysis of Investment projects Payback Period/Method  This is the simplest technique used in industry.  It consists of selecting those projects whose profits are big enough to repay the amount invested within a chosen number years.  Consider two projects A and B. In both cases ¢100m is invested today i.e. year 0. It is expected, that, the cash inflows for both projects be as follows: Year 0 1 2 3 4 5 6 7 A -100 30 30 40 20 10 0 0 B -100 30 30 30 30 30 10 10  Financial Analysis of Investment projects Payback Period/Method If a payback period of three years were chosen, which of the projects would be selected? The procedure  adding up the cash-flows.  observes which project attains ¢100m first  For project A total cash-flow is ¢130m.  Project B’s is ¢170m.  Looking at the year-by-year addition, Project A attains ¢100m by end of year three,  Whilst Project B attains ¢90m during the same period.  With a three-year payback, Project A is selected.  Financial Analysis of Investment projects Peak Profit Method This technique is similar to that of payback. Here, the value used is the peak profit and not the cash- flow. Additionally, a decision is based on only on a measure; the highest profit. Consider two projects; C and D. Initial investment in each is estimated at ¢100m  Lay out the profits year-by-year.  Express each year’s profit it terms of the initial investment  Multiply by 100,  This is the profit rate.  Select the project with the highest profit rate.  Financial Analysis of Investment projects Peak Profit Method Year 0 1 2 3 4 5 C -100 20 40 60 40 20 D -100 50 50 50 50 50 Year 0 1 2 3 4 5 Peak Profit C -100 20% 40% 60% 40% 20% 60% D -100 50% 50% 50% 50% 50% 50%  From the above, the peak profit for Project C is 60%  That for Project D is 50%.  Project C is selected.  Financial Analysis of Investment projects Peak Profit Method  The major assumption of this technique is that;  peak profit rate of return is a guide to average profitability of a project.  This assumption is valid, if and only if, projects have similar lengths of life and also, similar profit streams.  In practice, project lives do vary and so do profit streams.  Some projects have profits that build up slowly to a peak whilst others attain their peak early. Disadvantages  The peak method does not allow high early profits to be invested.  It does not deal adequately with capital allowance.  It does not calculate profit.  Financial Analysis of Investment projects Average Profit Method  Another non-discounted measure  This technique uses all data over the project life to compute a statistic.  Uses profit and not cash-flow  The assignment is to select one project out of the two for funding.  Each profit stream is summed  The sum divided by the number of years; in this case 5 years  Each mean is expressed as a percentage of the initial investment  The choice is in favour of the project with the highest average profit rate Year 0 1 2 3 4 5 Total Mean Mean Profit Profit Rate E -100 40 40 60 40 20 200 40 40% F -100 50 50 50 20 20 190 38 38%  Financial Analysis of Investment projects Accounting Rate of Return  A modification of the average profit method is the accounting rate of return. The formula is:  EstimatedAverage Pr ofit  ARR   *100  EstimatedAverageInvestment  Advantages Easy to understand. Widely used. Data readily available to calculate it. Disadvantages It does not take into account the time value of money. It is based on accounting profits and these are subjective.  Financial Analysis of Investment projects DISCOUNTED MEASURES OF PROJECT WORTH Net Present Value (NPV)  The cash-flows estimated for the project are in the future; they are not yet realised  The future is not here yet, but decisions would have to be taken in the present time  The question then is, what is the value of these future estimated cash-flows in the present or current period, or better still today?  future estimated cash-flows would have to be ‘brought’ to the current or present period  The net present value of a project is the sum of the present values of all the net cash flows that are expected to occur over the life of the project  Financial Analysis of Investment projects Net Present Value (NPV) T T B C N P V =  t = 1 ( 1 + t r ) t -  t = 1 ( 1 + t r ) t W h e r e : B t is p e r io d ic b e n e fit C t is p e r io d ic c o s t  is th e s u m m a tio n s ig n  The discounted rate should be either  the actual rate of interest on long term loans in the capital market or the interest rate paid by the borrower  The discounting period is normally equal to the life of the project.  Financial Analysis of Investment projects Net Present Value (NPV) Decision Rule: NPV > 0; project is viable, accept. NPV < 0; project is not viable, reject. NPV = 0; project is neither viable or not viable  The value of NPV suggests how much a project is adding in value terms to an existing entity or how much value the project is creating.  A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners  Since the goal of projects is to add value or increase owner’s wealth, NPV is a direct measure of how well this project will meet the goal.  NPV has units of currency such as BIrr or US dollars.  Financial Analysis of Investment projects Net Present Value (NPV) Consider a project, which has a cost of capital 10 percent Year 0 1 2 3 4 5 Cash flow -1,000,000 200,000 200,000 300,000 300,000 550,000 Therefore, 1,000,000 200,000 200,000 300,000 300,000 550,000 NPV  0  1  2  3  4  5  118,913 (1.10) (1.10) (1.10) (1.10) (1.10) (1.10)  Financial Analysis of Investment projects Net Present Value (NPV) We can also use the discount factor from present value tables and compute the NPV as shown in following table @10% Year Cash flow PV Discount PV Factor 0 -1,000,000 1 (1,000,000) 1 200,000.909091 181,818 2 200,000.826446 165,259 3 300,000.751315 225,395 4 300,000.683013 204, 904 5 550,000.620921 341,507 NPV 118,913  Financial Analysis of Investment projects  Independent projects are projects that are not in any way substitutes for each other.  In such cases the decision rule is to accept the project having positive NPV  Which means, if two projects have positive NPV and there is no budget constraint both could be accepted and we do not need to choose the one with higher NPV.  A mutually exclusive project is a project that can only be implemented at the expense of an alternative project as they are in some sense substitutes for each other.  Example of the mutually exclusive projects includes two versions of the same project, say with different technology, scale or time.  The decision rule for such projects is to accept the project with the highest NPV.  Financial Analysis of Investment projects Net Present Value (NPV) Consider projects, which has a cost of capital 30 percent Year 0 1 2 3 4 5 6 7 A -100 30 70 60 30 10 0 0 B -100 60 50 40 30 30 10 10 Cash-flow Analysis for Project A and B Cashflow Discount Factor Discounted Cashflow Year A B (1+0.30)^-t A B 0 -100 -100 1.0000 -100.00 -100.00 1 30 60 0.7692 23.08 46.15 2 70 50 0.5917 41.42 29.58 3 60 40 0.4552