Chapter 4--Project Preparation and Feasibility Analysis.pptx

project management presentation

1. Course name: Fundamentals of Project Management Course code: MAPMS - 611 Credit Hours : 3 Course instructor: Moges A. ( Ph.D in Management Studies)

2. Chapter 4 Project Preparation and Feasibility Analysis

3. 4.1. Project Preparation Projects that survive the early stage of successful identification need to be prepared and analyzed before money is allocated to them. Pre-feasibility study indicates that the project is promising and further work is justified, the project enters the next stage for more and sophisticated analysis supported by accurate information in the study. Project preparation necessitates a teamwork approach with professionals investigating different aspects of the project, working closely . They should exchange views and check their conclusions under the coordination of an expert working as team leader. The better a project is prepared , the easier and faster its implementation and lowers the probability of cost overruns.

4. Project Preparation ... Critical element of project preparation is: Identifying comparing technical and institutional alternatives for achieving the project’s objectives. Preparation requires feasibility study until satisfactory project is selected. Therefore, preparation is a feasibility study phase.

5. Feasibility Study : the major difference between the pre-feasibility & feasibility studies is the amount of depth. If the preliminary screening suggests that the project is prima facie worthwhile , a detailed analysis of the marketing, technical, financial, economic, and ecological aspects is undertaken. Feasibility study or appraisal provides a comprehensive review of all aspects of the project and lays the foundation for implementing the project and evaluating it when completed. At this stage a team of specialists (Scientists, engineers, economists, sociologists) will need to work together.

6. Feasibility - Detail study and report of the project contains : Background of the project Technical Study Market Study Organisation & Management Financial Analysis Economic Analysis Environmental Analysis Cross-cutting Analysis Sensitivity Analysis Risk Analysis + Other consideration

7. Feasibility study ... Therefore, feasibility study should provide all data, define and critically examine the commercial, technical, financial, economic and environmental aspects for each alternative. The data should be based on investigative efforts rather than on guesstimated.

8. Project Preparation ... Project preparation includes four main steps such as market & demand analysis, technical analysis, financial estimates, e conomic analysis, and socio-demographic analysis . Market and Demand Analysis: involves issues about the potential size of the market and the market share of the firm; and also demand forecasting. Technical Analysis: analysis of technical and engineering aspects of the project is done. Studies related with location and environmental impact assessment will made. Financial Estimates: involves discussions on the cost of the project, cost of production, working capital requirements of the project, and financial evaluation criteria. Economic Analysis, and Socio-demographic Analysis

9. I. Market and Demand Analysis In most circumstances, the first step in project preparation is to estimate the potential size of the market for the product proposed to be manufactured (or service planned to be offered) and get an idea about the market share that is likely to be captured. The task demands an in – depth study and analysis of various factors such as: existing pattern of consumption and growth , consumption of the market , nature of competition , income levels of the society , availability of substitutes , system of distribution channels , etc. The objectives of market and demand analysis in preparing a project are to: Identify potential consumers or buyers. Gathering secondary and/or primary data/ information Market survey Market classification/characterization of the market demand forecasting Uncertainties in demand forecasting Market planning

10. II. Technical Analysis Technical aspect of the project provides the basis for all other forms of project design and analysis because a technically unfeasible project must be either revised or abandoned, regardless of its performance in other areas. The broad purpose of technical analysis is (a) to ensure that the project is technically feasible in the sense that the inputs required to set up the project are available, and (b) to facilitate the most optimal formulation of the project interms of technology, size, location, and so on. The following are basic issues pertaining to technical analysis using common sense and economic logic. Manufacturing process /technology Technical arrangements Materials and Inputs Plant capacity Location and site Structures and civil works Environmental aspects

11. Technical Analysis ... Choice of Location: Proximity to raw materials and markets (Proximity to the sources of raw materials and nearness to the market), Availability of infrastructure (In a feasibility study, availability of power, transportation, water, and communications should be carefully assessed before a location decision is made. Transportation facilities (by rail, road, air, or water) may be available for the inflow of various inputs and for the marketing of outputs ). Labor situation: The key considerations in evaluating the labor situation are: Availability of labor, skilled, semi – skilled and unskilled; Existing labor rates; & Labor productivity. Governmental policies: Policies and regulations of a government have a considerable influence on location.

12. Technical Analysis ... Other factors: before making final location selection decision, several other factors have to be assessed as well. These are: Climatic conditions: like temperature, humidity, wind, sunshine, rainfall, snowfall, dust, flooding, and earthquakes have an important influence on location decision. General living conditions: the general living conditions, such as the cost of living , housing situation, safety, and facilities for education, health care, transportation and recreation need to be assessed carefully. Ease in Coping with Environmental Pollution: A project may eventually cause environmental pollution in various ways: it may throw gaseous emissions; it may produce liquid and solid discharges; it may cause noise, heat, and vibrations. The locational study should analyze the cost of alleviating environmental pollution to tolerable levels at alternative locations.

13. Technical Analysis ... Site Selection: Sites close to a city cost more whereas sites away from the city cost less. For sites available within the selected area, the following requirements and conditions are to be assessed: corporate strategies regarding possible future extension , supply and marketing policies ) Cost of land Site preparations and development, requirements and costs

14. Technical Analysis ... Structures and Civil Works Structures and civil works may be divided into three groups: (i)Site preparation and development: grading and leveling of the site; demolition and removal of existing structures; relocation of existing pipelines, cables, roads, power lines, etc; communications (telephone, telex, internet, etc.) (ii)Buildings and structures: such as (i) factory or process buildings; (ii) ancillary buildings required for stores, warehouses, laboratories, utility supply centers, maintenance services, and others; (iii) administrative buildings; (iv) staff welfare buildings, cafeteria, and medical service buildings; and (v) residential buildings. (iii)Outdoor works: include (i) supply and distribution of utilities (water, electric power, communication, Steam, and gas); (ii) handling and treatment of emission, wastages, and effluents; (iii) outdoor lighting (iv) landscaping; and (v) enclosure and supervision (boundary wall, fencing, barriers, gates, doors, security posts, etc.)

15. III. Financial Estimates/Analysis 1. Cost of Project The cost of the project represents the total of all items of outlay associated with a project that can be financed by long- term funds. Generally, the total outlays will include the following: Land and site development Buildings and civil works Plant and machinery Technical know – how and engineering fees Expenses on foreign technicians and training Miscellaneous fixed Assets Provision for contingencies

16. Financial Analysis ... 2. Cost of Production Generally, it is essential to make realistic forecasts of production or manufacturing costs for a project in order to determine it’s the future viability. Given the estimated production, the principal components of cost of production are: Material cost: predominantly variable costs, such as raw materials, chemicals, components, factory supplies and spare parts. Utilities cost: Utilities consist of power, water, and fuel. Labor cost: Cost of labour is the cost of all the manpower employed in the factory. Factory overhead cost: are fixed costs such as expenses on repairs and maintenance, rent, taxes, insurance on factory assets, and so on.

17. IV. Economic Analysis  State of the economy Overall rate of growth Growth rate of primary, secondary, and tertiary sectors Linkage with the world economy Trade surplus /deficits

18. V. Socio – demographic Analysis Population trends Age shifts in population Income distribution Educational profile Employment of women Attitudes toward consumption and investment

19. When a feasible study is completed , the various parties involved in the project will carry out their own appraisal of the investment project in accordance with their individual objectives and evaluation of expected risks, costs and gains. Appraisal is a critical review of all aspects of a project. Appraisal is the comprehensive and systematic assessment of all aspects of the proposed project. The project is viewed from different perspectives; technical, commercial, financial, economic, managerial and organizational. Project appraisal as carried out by financial institutions concentrates on the health of the company to be financed, the returns obtained by equity holders and the protection of its creditors. 4 . 2 . Project Appraisal

20. Project Appraisal ... Select the most likely project out of several alternative projects. Review the feasibility study critically Strictly apply sensitivity and risk analysis Compare with standards or establish standards Apply appraisal criteria like target rate, and/or industrial average Don’t overlook appraising designs, manpower & marketing procedures (like 4Ps)

21. If the appraisal team concludes that the project plan is sound, the investment may proceed. But if the appraisal team finds serious flaws, it may be necessary for the analyst to alter the project plan or to develop a new plan altogether. There are two methods of measuring the project worthiness. 1. Un-discounted measures 2. Discounted measures The basic underlying difference b/n these two lies in the consideration of time value of money in the project investment.

22. Undiscounted measures do not take into account the time value of money, while discounted measures do. For non-discounted method, does not consider the time value of money. For example, all dollars earned in the future are assumed to have the same value as today’s dollars. It is to ensure that the project represents a high priority use of country’s resources and in combination with other policies, contributes the maximum possible towards achieving national development objectives.

23. Project Appraisal ... Appraisal reports as a rule deal not only with the project but also with the industries in which it will be carried out and its implications for the economy as a whole . Thus, if a car manufacturing plant is to be appraised, the report will also review the relationship of the plant to its feeder industry, the transport sector, the availability of highways and the energy supply. For large scale projects, appraisal reports will require field missions to verify the data collected and to review all those factors of a project that are conditioned by its business environment, location and markets and availability of resources.

24. Questions & Suggestions?