Management & Entrepreneurship

(Course Code:10AL51)

Department of IEM
JSS Academy of Technical Education, Bengaluru-560060
Project Management

CHAPTER 5: Preparation of Project

 Course outline

• Introduction – Meaning, Identification, Selection.

• Project Report – Need, Significance, Contents and Formulation.

• Guidelines by planning commission for Report.

• Errors of Project Reports; Project Appraisal.

• Identification of Business Opportunities.

• Feasibility Study – Market, Technical, Financial and Social.

Introduction
Introduction – Meaning of a project

 ‘Specifically Evolved Work Plan’ devised to achieve specific objective within

a specified period of time.

 It is a scheme, design, a proposal of something intended to achieve.

 Each project differs in size, nature, objective & complexity.

Introduction – Meaning of a project

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 specifications.

“Projects are the Building Blocks of an Investment Plan”

Attributes / Characteristics
 Attributes/Characteristics

• Complex Activities Not simple / Repetitive acts

• Connected Activities Some order/sequence in which the activities are executed

• One Goal Projects must have a single goal as compared to a program

• Specified Time Projects have a specified completion date

• Within Budget Projects also have resource limits (people, money, machines)
Attributes/Characteristics

• According to Specification

• The customer or recipient of the deliverables from the project expects a

certain level of functionality and quality from the project.

Project vs Program

Project Program
A program is defined as an ongoing
Project includes all activities to complete
process or ongoing operation
a given job.
indefinitely.
It has narrow scope and has shorter It has broader scope and has longer
duration duration
Project is a part of Program Main activity

A program is a group of projects

Projects is individual activity. managed in a coordinated way to obtain
benefits.
Project Parameters

Project Parameters
Some common constraints that influence a project are:

1. Scope

2. Quality

3. Cost

4. Time

5. Resources

The scope and quality of a project are influenced by a variety of constraints

like time, cost and availability of resources.
Project Classification
Classification of Projects

 Quantifiable & Non-Quantifiable Projects

 Sectoral Projects

 Techno-Economic projects
Classification of Projects

 Quantifiable & Non-Quantifiable Projects

Projects for which a right quantitative assessment of benefits can be made are
termed as quantifiable projects

Ex: power generation, mineral, development, industrial development etc.,

 Projects for which quantitative assessment cannot be made are termed as

non-quantifiable projects

Ex: health, education, Defence etc.,

Classification of Projects

 Automobile sector
 Agricultural sectoral
 Power sector
 Sectoral Projects  Health sector
 Education sector
 Transport sector
 Manufacturing sector
 Food processing sector
 Mining sector
 Irrigation sector
Classification of Projects

 Techno Economic Projects

Factor intensity-oriented Classification

• Large Capital Investment, Labor intensive

Causation classification
• Demand/Raw material based

Magnitude-oriented classification
• Size based, Large, Medium, Small
Project Identification
Project Identification / Selection

Project selection process consist of Two main Steps:

 Project Identification
 Project Selection

Project Identification - Idea generation

 Selection process starts with the generation of a product idea.

 In order to select the most promising project, the entrepreneur needs to
generate a few ideas about the possible projects he/she can undertake.
 Project identification is concerned with collection of economic data and
analyzing it.
 Project Ideas - Ways or Sources: various internal and external sources

Opportunity Scanning & Identification

Knowledge of potential customer needs.

Watching emerging trends in demands for certain products.

Scope for producing substitute / alternative product.

Going though certain professional magazines.

Success stories of known entrepreneur or friend or relatives.

Making visit to trade fairs and exhibitions displaying new products and services.

Meeting with government Agencies.

Idea given by the knowledgeable person.

A new product introduced by the competitor.

Project Selection
 Project Selection

Project selection starts from where project identification ends.

A tool generally used for this purpose is: SWOT/C analysis.

The intending entrepreneur analysis his /her strength and weakness,

opportunities /competitive advantages and threats / challenges offered by each
of the project ideas.

Finally project selected to converted into enterprise.

The process involved in selecting a project out of some projects - zeroing in

process.
Project Selection Parameters

Technology

 Equipment

 Investment size

 Location

 Marketing
Project Report
Project Report

A project report or a business plan is a written statement of what an

entrepreneur proposes to take up.

 Well evolved course of action devised to achieve the specified objectives

within a specified period of time.

 Operating document / Roadmap / Guidelines.

 Contents of Project Report

• General information • Man power

• Promoter • Products

• Location • Market

• Land and building • Requirement of working capital

• Plant and machinery • Requirement of funds

• Production process • Cost of production and profitability of first ten years.

• Utilities • Break-even analysis.

• Transport and communication • Schedule of implementation.

• Raw material
Formulation of Project Report
 Formulation of Project Report

General • Biodata of promoter, Industry profile, constitution,

Information organization and product details.

• Site/location, infrastructure, raw materials, skilled labours,

Project Utilities, pollution control, communication and
Description transportation, Production process, machineries and
equipment, capacity of plant, technology and R&D.

Market Potential • Demand and supply, Marketing strategy, after sales service
 Formulation of Project Report

• Capital Cost and source of Finance

• Assessment of Working Capital

Economic and • Employment generation, Exports, local resource utilization,

social Variables development area.

Project
Implementation
• PERT and CPM
PLANNING COMMISSION GUIDELINES
Planning Commission Guidelines

In order to process investment proposals and arrive at investment decisions,

the planning Commission has issued guidelines for preparing/formulating
industrial projects.

1. General Information

Feasibility report should include an analysis of the industry to which the project belongs / past
performance / description of industry / role of Public sector / Allocation of investment funds.
 Planning Commission Guidelines

2. Preliminary analysis of alternatives

• This should contain present data on the gap between demand and supply for the outputs
which are to be produced.
• Data on the capacity that would be available from projects that are in production or under
implementation at the time the report is prepared.
• A complete list of all existing plants in the industry, giving their capacity and their level of
production actually attained.
• A list of all projects for which letters of intent licenses have been issued and a list of proposed
projects.
Planning Commission Guidelines

3. Project Description

• The feasibility report should mention the technology/process chosen for the project.

• Information relevant to determining the optimality of the location chosen.

• To assist in the environmental effects of a project, every feasibility report must present the

information on specific points, i.e. population, water, land, air, flora, & fauna, effects arising

out of projects pollution, other environmental disruption etc.

 Planning Commission Guidelines

4. Marketing Plan

It should contain the following items;

• Data on the marketing plan

• Demand & prospective supply in each of the areas to be served.

• Methods & the data used for main estimates of domestic supply.

• Selection of the market areas.

• Estimates of the degree of price sensitivity.

• It should contain an analysis of past trends in prices.

 Planning Commission Guidelines

5. Capital Requirements & Costs

The estimates should be reasonably complete & properly estimated.

Information on all items of costs should be carefully collected & presented.

6. Operating Requirements & Costs

• Operating costs - incurred after the commencement of commercial production.

• Information about all items of operating costs should be collected.

• Operating costs relate to the costs of raw materials & intermediaries, fuel, utilities, labour, repair

& maintenance, selling expenses & other expenses.

 Planning Commission Guidelines

7. Financial Analysis

• This strategy is to present some measures to assess the financial viability of the project.

• Foreign Exchange Requirements should be cleared by the Department of Economic Affairs.

• The feasibility report should take into account income tax rebates for priority industries,

incentives for backward areas, accelerated depreciation etc.

• The sensitivity analysis should also be presented – i.e. the sensitivity of the rate of return of

change in the level & pattern of product prices.

 Planning Commission Guidelines

8. Economic Analysis

• Social profitability analysis needs some adjustment in the data relating the costs & returns to

the enterprise.

• One important type of adjustment involves a correction in input & costs, to reflect the true

value of foreign exchange, labour & capital.

• The enterprise should try to assess the impact of its operations on foreign trade.

• Indirect costs & benefits should be included in the report. If they cannot be quantified, they

should be analysed & their importance emphasized.

Network Analysis
Network Analysis

Network analysis is the general name given to certain specific techniques which
can be used for the planning, management and control of projects.

• The network analysis methods are used in project management where the
elements are key activities of the project in the mutual time relation.

• The network analysis methods focus on calculating or critical path

optimizing between the elements.
Network Analysis

Among basic network analysis methods include:

• CPM (Critical Path Method)

• CCM (Critical Chain Method)

• PERT Method (Program Evaluation and Review Technique)

• GERT Method (Graphical Evaluation and Review Technique)

• MPM Method (Metra Potential Method)

 Network Analysis

• The network analysis methods are related to the concept of network diagram,
which is a view of the project as a diagram which expresses various links
between the project activities.

• The network diagrams and network analysis methods are based on the Graph
Theory.
Network Analysis

Logical mathematical model of the project based upon the optimal duration
CPM required for each activity and optimal use of available limited resources.
It is a deterministic model.

• Scheduling technique, It shows any job or project as a set of

PERT processes/activities which must take place in a certain sequence.
• It is a probabilistic model and introduces uncertainties in project network.

• Networks representing research and development project the process is

GERT repeated till the desired out come is achieved.
• GERT network only simulation can be used.
 Network Analysis

Use of PERT

• The activities of the project are identified along with their interrelationships and graphically

represented.

• Time required for completing each activity/process is estimated.

• Minimum time required for completing the entire project is estimated.

• The critical activities are identified for the efficient allocation of resources in order to complete

the project at the earliest.

• Closer watch on critical and other activities so as to complete the project on time.
Network Analysis - CPM

Example
The following table gives the activities and the time required to complete each activity of the project.
Network Analysis - CPM

Example
The following table gives the activities and the time required to complete each activity of the project.
 Network Analysis - CPM

Example
The following table gives the activities and the time required to complete each activity of the project.

• Since the path 1-2-5-6 consumes longest time (18 days).

• it is known as critical path and the activities 1-2, 2-5 and 5-6 are known as critical activities.
• Hence the project completion time is 18 days.
Network Analysis

Differences between PERT and CPM

PERT CPM

Event oriented approach Activity oriented approach

Allows uncertainty Does not allow uncertainty

Probabilistic model Deterministic model

Time based Cost based

COMMON MISTAKES BY ENTREPRENEURS IN PROJECT FORMULATION
COMMON MISTAKES BY ENTREPRENEURS IN PROJECT FORMULATION

• Selection of project area

• Market study and analysis

• Selection of technology

• Optimistic estimates

• Ownership form

• Selection of location
PROJECT FEASIBILITY STUDY
PROJECT FEASIBILITY STUDY

Project feasibility analysis is carried out to ensure viability of project.

The project feasibility study is

• Market feasibility

• Technical feasibility

• Financial feasibility

• Economic feasibility

• Ecological feasibility
PROJECT FEASIBILITY STUDY

• Demand for the proposed product/service.

Market Feasibility
• Market share of the project under consideration.

Market analysis requires variety of information and appropriate forecasting methods.

Consumption trends in the past and the present / Past and present supply

position / Production possibilities and constraints / Imports and exports /

Structure of competition / Cost structure / Consumer behaviour, intentions,

motivations, attitudes, preferences and requirements / Distribution channels /

Administrative, technical and legal constraints.

PROJECT FEASIBILITY STUDY

Technical Determine whether prerequisites for successful commissioning of the project have
Feasibility been considered.

Technical analysis addresses the following;

• Has the availability of raw material, power, and other inputs been established?
• Is the selected scale of operation optimal?
• Is the production process chosen suitable?
• Are the equipment and machines chosen appropriate?
• Have the auxiliary equipment and supplementary engineering works been provided?
• Has provision been made for treatment of effluents?
• Is the proposed layout of the site, buildings and plant sound?
• Have work schedules been drawn up realistically?
• Is the technology proposed to be employed appropriate from the social point of view?
PROJECT FEASIBILITY STUDY

Financial
To ascertain whether the propose project is financially viable.
Feasibility

The aspects to be looked into;

• Investment outlay and cost of project

• Means/modes of financing
• Project profitability
• Break-even point
• Cash flows of the project
• Investment worthiness judged in terms of various criteria of merit
• Project financial position
• Level of risk
PROJECT FEASIBILITY STUDY

Economic/Social Cost-
Judging a project from the larger social point of view.
benefit Analysis

The aspects to be looked into;

• What are the direct economic benefits and costs of the project measured in terms of shadow
(efficiency) prices and not in terms of market prices?

• What would be the impact of the project on the distribution of income in the society?

• What would be the impact of the project on the level of savings and investment in the society?

• What would be the contribution of the project towards the fulfilment of certain like self-
sufficiency, employment and social order?
PROJECT FEASIBILITY STUDY

Ecological
Environmental concerns should be addressed properly.
Analysis

The aspects to be looked into;

• What is the likely damage caused by the project to the environment?

• What is the cost of restoration measures required to ensure that the damage to the

environment is contained within acceptable?

End of Module