9/24/2019 NICMAR - Project Management: PROJECT FORMULATION AND APPRAISAL

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NICMAR - Project Management

This blog is created to help people pursuing the NICMAR - SODE (school of Distance Education) Project Management Course. In
this blog project management concepts will be explained and also approach the assignments will be discussed. This blog is meant
as an additional resource to supplement the distant learning course.

Thursday, 6 September 2012 Labels

CONSTRUCTION QUALITY
PROJECT FORMULATION AND APPRAISAL CONTRACTS MANAGEMENT
Construction Finance Management
Assignment
Assignment Construction Personnel Management
Assignment
Any company that has to survive in a competitive environment cannot remain complacent with the present. It has to
continuously bring about change in order to adapt to the altered environment. MANAGEMENT IN ORGANISATION
ASSIGNMENT
PROJECT FORMULATION AND
Investment opportunities in India are today perhaps at a peak. Supported by India’s natural strengths, the country offers
APPRAISAL
investment opportunities in excess of $500 billion in diverse sectors over the next five years.
PROJECT MANAGEMENT 1 POWER
PLANTS and ENGINEERING
Projects that are endeavors to create unique products and services are basically the instruments leading to organizational
PROJECT PLANNING AND
growth. Projects have a long term impact on the character of the organization. Projects create wealth not only for the CONTROL
organization but also for the nation. Projects, therefore, form a very important part of the organization’s strategy for PROJECT RISK MANAGEMENT
survival & growth and therefore are the main concern of the corporate management.
SAFETY AND ENVIRONMENT

Realizing the tremendous opportunities, the most of the pragmatic organizations are planning to invest in new projects.
Every project starts with the perception of an opportunity. The better this is characterized, the easier it will be to judge the Followers
levels of expenditure and risk that are justified. Identifying the pattern by which technology creates new products & Followers (40) Next
services and exploiting them early gives the company a significant competitive advantage.

In the light of your studies prepare an assignment on project formulation, evaluation and appraisal of a hypothetical
project by covering the following:

1. Market Analysis
2. Technical Analysis
3. Financial Analysis

INTRODUCTION
The project evaluation process involves more than just determining a project's expected revenues and profitability; it also
involves a study of the key factors that affect a project and their financial impact on the project. In addition, a project
evaluation includes strategic evaluation, economic evaluation and social impact evaluation (Refer Exhibit I). Follow

Blog Archive

▼
▼ 2012 (6)
▼
▼ September (6)
PROJECT RISK MANAGEMENT
PROJECT MANATEMENT - 1:
POWER PLANTS &
ENGINEERING...
CONSTRUCTION QUALITY,
SAFETY AND ENVIRONMENT
PROJECT PLANNING AND
CONTROL
PROJECT FORMULATION AND
APPRAISAL
ASPECTS OF PROJECT APPRAISAL Source: Desai Vasant, “Project Management,” Pg. No. 153
CONTRACTS MANAGEMENT

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While the financial evaluation of a project aims at ascertaining the most efficient strategy for delivering the desired output,
►
► 2011 (3)
the strategic evaluation ensures that the project is consistent with the output objectives of the firm.

PROJECT EVALUATION TECHNIQUES Source: Pamela Peterson “Financial Management and Analysis,” Pg. No. 433
The
economi
c evaluation of the project, however, seeks to ensure that the delivered output is benefiting the public at large. The
evaluation of social impact aims at ensuring that the consequences of a project (in terms of employment, output, savings
and so on) are beneficial to the public.

A HYPOTHETICAL CASE STUDY

Govindam Infrastructure Company is focusing on investments in emerging retail sector throughout India. It has proposed
to develop a commercial space in Panaji-Goa. This gives an opportunity to enter a market not tested so far by the big
players in retail sector and reap benefits of the first footer.

Goa State has established itself among the fastest growing industrial & commercial centers in India. It has made
impressive progress in all round development, measured by socio-economic indicators and ranks among the leading
union territory states of India. This is one of the most urbanized states in India. Tourism and mining are the main sectors
of the state economy. Sizeable percentage of population works in the Middle East and western countries and brings
home not only valuable foreign exchange kitty but also a new consumer test of those places. The tourists from India and
all over the world are spending much on leisure while on holidays in Goa. This brings us a good opportunity to invest in
retail sector.

MARKET ANALYSIS
Situational analysis
Company proposes to develop a Shopping Mall in Panaji-Goa. The market is mainly consisting small-scale retail outlets,
virtually monopolized by the sellers. The market also lacks presence of strong cooperative sector. Due to scattered and
satellite patterns of development, the city lacks cohesive and homogenous volume of population compared to other
Indian cities. However, excellent infrastructure, importance of capital place, large base of floating population, high
purchasing power of consumers and higher level of consumer spending gives a solid base for investment decision.
Hence, we decided to develop a commercial space it consisting mainly of following facilities.
• Hyper market dealing in grocery, and household items
• Branded clothes, textile products, cosmetics.
• Processed agriculture, horticulture, floriculture products.
• Beverages and restaurant.
• Consumer durable goods etc.
• Handicrafts and antiques

Secondary Information
Economic Profile of Goa: The Eleventh Finance commission Report, 2000 ranked Goa as the premier state in terms of
social and economic infrastructure. Goa is an attractive destination for foreign Direct Investment (FDI). The contribution of
FDI to the state’s economy has increased tenfold in the past years.

POPULATION (2001 census) 13,47,668

MALES 6,87,248
FEMALES 6,60,420
URBAN POPULATION % 49.47
LITERACY RATE ( census 2001 ) in % 82
MALE LITERACY in % 88.4
MALE LITERACY in numbers 5,41,032
FEMALE LITERACY in % 75.4
FEMALE LITERACY in numbers 4,44,530

Census of India has projected population by Sex i.e. 16,28,000 for Goa as on 1st March – 2008

No. of
Sr. No. District Total/Rural/Urban Households Persons Male Females

1 North Goa Total 1,64,129 7,58,573 3,88,502 3,70,071

2 North Goa Rural 88,265 4,16,824 2,11,543 2,05,281
3 North Goa Urban 75,864 3,41,749 1,76,959 1,64,790
4 South Goa Total 1,30,683 5,89,095 2,98,746 2,90,349
5 South Goa Rural 56,964 2,60,267 1,29,002 1,31,265

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6 South Goa Urban 73,719 3,28,828 1,69,744 1,59,084

Source of information: Census of India

All India pattern of consumption in 2006-07: (Ref. annexure no.lII)
Out of every rupee spent in 2006-07 by the average urban Indian on consumption, 39 paise were spent on food. Of this, 9
paisa was spent on cereals and cereal substitutes, 7 paisa on milk and milk products, 6 paise on beverages,
refreshments and processed food, and 4 paise on vegetables. There was little difference between rural and urban
households in the share of the budget allocated to fuel and light (10% for rural, 9% for urban) and clothing, including
bedding and footwear (7% for rural, 6% for urban).

The average urban Indian differed noticeably from the rural mainly by spending only 9 paise out of one rupee on cereals,
but as much as 14 paise on consumer services, 7 paise on education and 5 paise on rent. In fact the urban Indian
devoted only 39 paise of the rupee on food, spending a smaller portion of the rupee than the rural Indian on every food
group except the category "beverages, refreshments and processed food".
Percentage of population below specific MPCE: (Ref. annexure no.lll & VI)
In 2006-07, roughly one-half (50.3%) of the rural population of India had MPCE less than RS.580 (column 2 of Table P1)
compared to only 17.4% of the urban population column 6). For urban India, the median level of MPCE was Rs.990.
Average MPCE on groups of items of consumption: (Ref. annexure no.IV)
For urban area applicable to Group of union territories shall be applicable to Goa.
Average MPCE for urban area applicable to Goa may be considered as 1944.88 for food and non-food group of

expenditure

DEMAND FORECASTING
Demand forecast was done using casual method of forecasting. As the project involves products of direct consumption,
Consumption Level Method suits best to forecast demand of the products
Estimate based on income and price elasticity of demand: (Ref. annexure no. I & IV)
Aggregate demand can be worked out from secondary information available with us (ref. Annexure)
a) Total population as per 2001 census : 13,47,668 for Goa
b) Projected population for the Year 2008 : 16,28,000 for Goa
c) Growth rate per year: : (1628000-1347668) x100
1347668 x 8yrs.
d) Projected population for the Year 2010 : 16, 28,000 x (1 +2.6)2
= 21100734
e) Projected population for north Goa in the Year 2010 : 7,58,573 x (1+2.6)2
= 9831106 - Aggregate demand
f) Rise in level of disposable income :
Per capita income in the year-2000-01 =Rs. 49693
Per capita income in the year-2004-05 =Rs. 58184
Rise in level of disposable income =17%
g) Supply of primary articles of consumption in the year-2001 =156.9
(All India fig.) In the year-2005 =170.1
Rise in level of supply i.e. (+) 8.40% in the year-1992 =5.80kg
In the year-2005 =7.20kg
Rise in level of supply i.e. (+) 24.13% in the year-1992 =13.50kg
In the year-2005 =16.30kg
Rise in level of supply i.e. (+) 20.74% in the year-1992 =24.50metre
In the year-2005 =31.40metre
Rise in level of supply i.e. (+) 28.16% in the year-1992 =709.00gm
In the year-2005 =690.00gm
Fall in level of supply i.e. (-) 2.67%
I) MPCE for urban area (all India) in the year-1987 =139.73
In the year-2007 =517.25
Change in MPCE = 2.7times
Conclusion: (Ref. annexure no.lI)
1) From above study, we can project- Aggregate demand =. (+) 2.60%
2) From above study, we can project- Rise in level of income = (+) 17.00%
3) From above study, we can project- Rise in Aggregate supply (avg.) = (+) 15.75%
4) From above study, we can project- Rise in MPCE = (+) 2.70 times
Hence, we project sufficient demand exists that needs to be fulfilled.

TECHNICAL ANALYSIS

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DETAILS OF FACILITIES:
The proposed shopping mall may have outlets as detailed below
- Departmental Store

- Fashion and Shoes

- Health and Beauty

- Food

- Sports and outdoor

- Electrical and phones

- Jewellerys

- Gifts and Music

- Children

- Miscellaneous
Arrangements for process &technical knowhow:
• The project work may be taken up on E.P.C Contract basis in a time bound manner.

• Technical collaboration may be made for commissioning and training of personnel.

• Various systems such as crowd control, display and information

systems, for shops parking areas, lounge; passages are to be provided.

• Plants and Machineries for processing, material packaging, labeling, is required.

• Sound arrangements for Power back up, air-conditioning, Escalators, capsule lifts, waste disposal etc required to be
planned complying all the regulations.
Capacity strategy:
• The only limiting factor from aggregate demand point of view discussed in the last chapter is population growth rate.
This is lesser than other Indian states; hence, we should adopt 'CHASING' strategy.

• The projected demand and existing demand to be diverted may take longer time span.
Location of Site:
• The project site is located in the capital city of Panaji. The proposed site is situated in the EDC Plaza behind central bus
stand and hence a very convenient and crowd pulling location.

• Proximity to markets geographically, the place is centrally located between the two districts of the state. The city is being
an important cultural, political and economic centre attracts sizeable population from all over the state and huge flow of
domestic and worldwide tourist ready to spend.

• Proximity to Raw material sources: The neighboring districts of Sindhudurg Kolhapur and Belgaon offers cheap sources
of commodities agriculture produce and dairy products. Supply of beverages is locally available and further can be
strengthened through tie up with local producers. Supply of Consumer durables Garments and textile products can be
directly arranged through supply agreements with the manufacturers.

• Industrial infrastructure: Goa has one of the best infrastructures in place. Uninterrupted power supply at reasonable
tariff, advanced telecommunication facilities, Road network with better quality riding surface, Convenient Railway network,
proximity to port and inland navigation are available.

• Urban infrastructure: Apart from industrial infrastructure, proper urban facilities are available such as housing schooling
hospitals, banks etc.

• Labour situation & Availability: The city boasts better quality and educated labour force suitable for trading activities. The
level of labour union activism is low due to migration, heterogeneous mix of labour force from different geography etc.

• Govt. policies: As per data published by RBI, FDI Equity inflows (from April 2000 to September 2008) in Goa are RS.1
047crore, which is 0.33% of total FDI inflows in India and ranks ninth in attracting investment. This is quite significant
considering size of the state and economy.

• Climatic condition: Except two months of active heavy monsoon, climate is moderate and hardly disrupts economic
activities taking place. It does not pose any significant challenge to our proposed business.

Proposed Site
• The site is completely developed by the EDC (Economic Development Corporation) of Goa. The site is a leveled plot
with flat topography. It is located near the city entry point and emerging fast as a central business zone. The place has
become popular and very convenient to the people all over Goa due to location near the main bus stand.
• Many of the business activities are concentrated in this area due to its suitability. A foundation stratum is marshy soil
due to reclamation of backwater area and hence needs extra cost. Supply of power, water is available in the vicinity and a
waste disposal system available in the area.
Work schedule planning:
The work schedules shall be thoroughly prepared and correlated to activities and time estimates.
Buildings and Structures

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Following activities required with distinct and meticulous planning of the interior and exterior. The total area required as
per break up tabulated here.

Sr. No. Sections Built up area Requirement in( Sqmt)

1 Departmental stores 3000.00

2 Fashion and stores 500.00

3 Health and Beauty 500.00

4 Food 1500.00

5 Sports and Outdoor 500.00

6 Electrical and phones 500.00

7 jwellery 500.00

8 Gifts and usic 500.00

9 Children 500.00

10 Miscellaneous 500.00

11 Administration and Security 500.00

12 Processing & Packaging 1000.00

Health, Ventilation and air conditioning

13 500.00
system (HVAC)

Total 10500.00

14 Parking 5000.00

FINANCIAL ANALYSIS
COST OF PROJECT
Sr
Quanti
. Unit rate / Cost percentage of
Component of Project ty in Cost
N development
Sqmt
o.
Land and Building
10000. 7,20,00,000.
1 Land cost 5000.00/ sqmt
00 00

7,50,00,000.
Buildings ( with area @ 2100.00 sqmt per
10500. 00
2 floor Keeping @ 0.2 FSI permissible for 15000.00 / sqmt
00 2,37,00,000.
future needs)
00

7900.0 3000.00/sqmt 2,37,00,000.

3 Parking and Landscape Development etc.
0 3000.00/sqmt 00

4 Architect / Consultants @ 2% of (1,2& 3)3 34,14,000

Other Expenses

As per
2,00,00,000.
1 Plants & Machineries Plant utilities quotation
00
As per quotation

2 Technical Know - how fee As per quotation 50,00,000.00

3 Misc. Fixed assets As per quotation 50,00,000.00

4
Preliminary and capital issue expenses As per quotation 10,00,000.00

20,51,14,000
Total
.00

5 Pre Operative Expenses @2% 41,02,280.00

6 Provision for Contingencies @3% 61,53,420.00

Total Cost of the Project 21,53,69,700

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Calculation of Revenue

Year 1910 1921 1931 1940 1950 1960 1971 1981 1991 2001 2011

Population Growth Rate 2.36 (3.55) 7.62 7.05 1.21 7.77 34.77 26.74 16.08 15.21

Three Months Moving

2.14 3.71 5.29 5.34 14.58 23.09 25.86 19.34
Average

Two Months Moving Average 0.59 2.04 7.34 4.13 4.49 21.27 30.75 21.41 15.64

Population forecast of Year 2011

Sum of square error (three months) = 2.142 + 3.712 + 5.292 + 5.342 + 14.582 + 25.862
= 216.83

Sum of square error (three months) = 0.592 + 2.042 + 7.342 + 4.132 + 4.492 + 21.272 +
30.752 + 21.412
= 243.99
1. Hence, we can assume, population growth rate applicable to year – 2011 i.e. 19.34% due to lower average
square error i.e. 216.83
2. Projected population in the year 2011 i.e. 50 percentage of North Goa district plus 50% of south Goa district,
which will serve as a consumer base.
( 1,34,7668/2) x 19.34 / 100 = 2,60,638
4. Expected sales per Month ( Revenue)

Here, we assume 10% of the population uses this mail mall to fulfill their needs Hence = 10% 260638
= 26063.00 Nos. MPCE for Goa = Rs. 1974.88 for urban india in the
year 2007. (Ref. group of UTs as per ANNEXURE NO.)
Expected sales per month = 26063.00 nos x 1974.88/2 = 2,57,35,648.72/- Hence , expected
sales per annum Rs.30,88,27,783.60

Calculation of Costs
Assuming total cost @ 80% of expected sales per annum

Sr. No. Item Description Estimated Amount

1 Total Material cost @ 60% 14,82,37,336.00
2 Total utilities cost @ 5% 1,23,53,111.00
3 Total Labour cost @ 10% 2,47,06,222.00
4 Total Overheads @5% 1,23,53,111.00
5 Total service cost @ 5% 1,23,53,111.00
6 Total Administrative cost @ 5% 1,23,53,111.00
7 Total Sales Expenses @ 5% 1,23,53,111.00
8 Total Royalty payable @55 1,23,53.111.00
9 Gross Total 24,70,62,227.00

Financial Structure
Mode of Percentage Amount Rs. In Cr.
Finance

Equity @ 50% 10.78

Term Loan @ 50% 10.77

Total 100% 21.55

Operating Cost with Yearly Breakup

Cost of the project Rs. 21,53,69,700.00. Period of completion of Project- 2 Year.

For the year ending December 2011

Opening Balance – Rs. 30,88,27,784.60 + Rs. 30,99,51,009.00
11,23,225.00

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Add -

Cash – Interest earned @ 9.5% on Rs. 11,23,225 Rs. 1,06,706.00

Less –

Cash – for Purchase of material, wages and other Rs. 24,70,62,227.00

expenses

Cash – Release of security deposit ( defect liability ) Rs. 3,23,05,455.00

@ 15% of Rs 21,53,69,700.00

Cash – for repayment of loan @ 11% and 05 years Rs. 3,62,,91,046.00

term

Closing Balance Rs. (56,01,013)

For the year ending December 2012

Opening Balance – Rs. ( 56,01,013) + Rs. Rs. 30,32,26,771.00
30,88,27,784.60

Add-

Cash – Interest earned NIL

Less-

Cash for purchase of material, wages and Rs.24,70,62,227.00

other expenses

Cash- for repayment of loan @ 11% and 05 Rs. 3,62,91,046.00

years term

Closing Balance Rs. 1,98,73,498.00

For the year ending December 2013

Opening balance – Rs. 1,98,73,498.00 +Rs. Rs. 32,87,01,282.00
30,88,27,784.60

Add-

Cash – Interest earned @9.5% on Rs. Rs. 18,87,982.00

19873498.00

Less-

Cash – for purchase of material, wages and Rs. 24,70,62,227.00

other Expenses

Cash – for repayment of loan @ 11% and 05 Rs.3,62,91,046.00

years term

Closing Balance Rs. 4,72,35,991.00

EVALUATION OF FINANCIAL VIABILITY

Pay Back Method
Payback period = cash investment / cash returned per year
For Cash, investment of rs. 10,76,84,850.00 per annum
Cash returned in 2012 is Rs. 1,98,73,498.00
Cash returned in 2012 is Rs. 4,72,35,991.00

Cash to be returned at the end of 5th year = 10,76,84,850.00 – 1,98,73,498.00 –

4,72,35,991.00
= 4,05,75,361.00

Assuming earnings remain same in the sixth year, period required to recover above amount Rs. ( 4,05,75,361.00 /
4,72,35,991.00)/12 = 10.3 , Say 3 Months

Hence, Payback period for the project is 05 years and 10 Months

Net Present Value Method

NPV = [ CF1 / (1+K) ] + [ CF2 / ( 1+K) ] + [CF3 / ( 1+K) ]+…up to CF5 – INVEST

Here, PV1 = Rs. 12,33,08,800.50 / ( 1+ 0.11) = 11,10,89,009.50

PV2 = Rs. 11,23,225.00 / ( 1+ 0.11)2 = 9,11,634.00
PV3 = Rs. (56,01,013) / ( 1+ 0.11)3 = (40,95,42.43)
PV4 = Rs. 1,98,73,498.00 / ( 1+ 0.11) = 1,30,91,288.70
PV5 = Rs. 4,72,35,991.00 / (1+0.11) = 2,80,32,261.59
Sum of PVs = 14,90,28,782.00

Hence NPV = 14,90,28,782.00 – Rs. 10,76,84,850.00 = Rs. 4,13,43,931.96

As the value of NPV is Positive, investment is advisable for the project.

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References:
1. Project financing in corporate sector by C.G. Karandikar / G.M Dave

2. Construction Finance management ( NCP 29 ) by NICMAR

3. Project formulation and Appraisal ( PGPM – 21) By NICMAR

4. Website: http:/indiabudget.nic.in

5. Website: Census of india

6. NSS 63rd Round ( July 2006 – June 2007)

Posted by Unknown at 05:22

Labels: PROJECT FORMULATION AND APPRAISAL

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