MODULE - I

1.1 ATTRIBUTES OF A PROJECT:

Project:
A project is a temporary work plan devised to achieve a specific objective within a specified period of time to bring about beneficial change or added value. So, it is an initiative to bring about change in product or services. Its purpose is to perform a task with well defined objectives, schedules and budgets. Each project differs in size, nature, objectives and complexity. Normally a project begins with a clear objectives, generating activities around the specific objectives, integrating bunch of resources (i.e., men, machines, materials and money), that are directed towards the fulfillment of objectives. So, project is accomplished by performing a set of activities. For example, construction of a house is a project. It consists of many projects like digging of foundation pits, construction of foundations, construction of walls, fixing of doors and windows, fixing of sanitary fittings, wiring etc. Several economists and bankers have defined a project in different ways. The World Bank defines a project as an approval for a capital investment to develop facilities to provide goods and services. The Oxford English Dictionary defines project as an individual or collaborative enterprise that is carefully planned and designed to achieve a particular aim. According to Project Management Institute a project as A temporary endeavor undertaken to create a unique product or service.

According to Harrison project as a non-routine, non-repetitive, one-off undertaking normally with discrete time, financial and technical performance goals to be achieved. Thus, a project is a well planned activity that includes a correct consideration of alternatives, identification of key issues, broad participation and enforceability. It should be neat, clear and specific whose objective may be to create, expand or develop certain facilities to increase the production of goods or services to the community. Examples of Projects: Career development (education and training courses) Designing and implementing a computer system Hosting a holiday party. Designing and producing a brochure. Executing an environmental clean-up of a contaminated site The lunch of a new product. The development and introduction of a new services The development of a management information system The introduction of an improvement to an existing process Project Objectives: The objectives (or goals) of any project will be, To complete the project within the allotted (or budgeted) funds. To complete the project within the scheduled time limit. To execute the project in such a way that the project meets the quality standards. To ensure that the project is completed to the satisfaction of the end users. Avoiding unproven equipments Project objectives are to be kept in mind by all the members of the project team throughout the period of project implementation. All decisions, whether a major decision or a minor

one are to be taken keeping in view the project objectives. The project objectives shall remain as the guiding force for the project team.

Attributes or characteristics of a project :

From the above definitions, it can be inferred that, each project is different in itself. Projects are not homogeneous, may be their purpose is similar. The distinctive characteristics of a project are thus: 1. Projects have clear objectives: projects have a clearly-defined objective stated in terms of scope, schedule, and costs. 2. Projects are realistic: their aims must be achievable, and this means taking account both of requirements and of the financial and human resources available. 3. Projects are limited in time and space: A project has a definite time limit. It cannot continue forever and are implemented in a specific place and context. 4. Projects are collective: projects are the product of collective effort. They are run by teams, involve various partners and cater for the needs of others. 5. Projects are unique: Every project is unique and no two projects are similar. 6. Single- time activity: No project is often repeated. It will performed only once. 7. Projects Includes risk and uncertainty: every project is different and they always involve some uncertainty and risk. The degree of risk and uncertainty will depend on how a project has passed through its various life-cycle phases. 8. Projects require evaluation the criteria for evaluation need to be established from the beginning 9. Projects have life-cycle: Project will also be reflected and influenced by the lifecycle phases and to which the success or failure in the project can be ascribed. 10. Projects involve people, (project manager and project team), not the procedures and techniques, that are critical to accomplishing the project objective.

11. Customer specific nature: A project is always customer specific. It is the customer who decides upon the product to be produced or services to be offered. 12. Optimality: A project is always aimed at optimum utilization of resources for the overall development of the organization. 13.Complexity: A project is a complex set of activities relating to diverted areas. Technology survey, choosing the, appropriate technology, arranging for financial resources, and execution of the project in time contribute to the complexity of the project. 14.Flexibility: Change and project are synonymous. Always a project witnesses

multiples of modifications and changes in its original plans, programmes and budgets. 15. Response to Environments: Projects take shape in response to environments. PROJECT CLASSIFICATION: Projects can be classified under different heads, some of which are explained below.
1. Based on the Type of Activity:

Under this category, projects can be classified as industrial projects and non-industrial projects. Industrial projects are set up for the production of some goods. Projects like health care projects, educational projects, irrigation projects, soil conservation projects, pollution control projects; highway projects, water supply projects etc. come under the category of non-industrial projects. Investments in non-industrial projects are made by the Government and the benefits from such projects are enjoyed by the entire society of people. It is difficult to quantify the benefits enjoyed by the society out of non-industrial projects.
2. Based on the Location of the Project:

Under the category, projects can be classified as national projects and international projects. National projects are those set up within the national boundaries of a country, while

international projects are set up in other countries. International projects may be either projects set up by the Government or by the private sector. The following are the major forms of international projects. _ setting up of fully owned subsidiaries abroad _ setting up of joint ventures abroad _ setting up of projects abroad by way of mergers & acquisitions 3. Based on Project Completion Time Based on the constraints on project completion time, projects can be classified into two types, viz., normal projects and crash projects. Normal projects are those for which there is no constraint on time. Crash projects are those which are to be completed within a stipulated time, even at the cost of ending up with a higher project cost. For example, construction of canal lining with the condition that the work should be completed before the monsoon starts is a crash project. 4. Based on Ownership: Based on ownership, projects can be classified into private sector projects, public sector projects and joint sector projects. A private sector project is one in which the ownership is completely in the hands of the project promoters and investors. Profit maximisation is the prime objective of private sector projects since the investors invest their money in such projects only with the sole idea of earning better returns. Public sector projects are those that are owned by the state. The evolution and growth of public sector enterprises is the natural consequences of the efforts of Governments for undertaking development in a country. The growth of public sector enterprises varies from country to country. In a country that follows only the system of private enterprises (USA, for example) there is hardly any public sector enterprise except for essential sectors like defense sectors, public utility services etc. Joint sector projects are those in which the ownership is shared by the Government and by private entrepreneurs. The main consideration for the Governments investment in joint

sector projects is to make use of the managerial talents, entrepreneurial capabilities and marketing skills of the private entrepreneurs. Joint sector offers hope to the private entrepreneurs since the Government shares the investment required for the project. 5. Based on Size: Projects can be classified based on the size into three categories, viz., small projects, medium sized projects and large projects. The size is normally expressed in terms of the amount of investment required. The investment limit for the different categories of projects are announced by the Government and this undergoes periodical changes keeping in view the inflation, the decision to offer certain incentives to projects categorized as small scale projects etc. As per the directives of the Govt. of India, projects with investment on plant and machinery up to Rs. 1 crore are categorized as small scale projects while those with investment in plant and machinery above Rs. 100 crores are categorized as large scale projects. Projects with investment limit between these two categories are medium scale projects.

Attributes or skills of a good project Manager:

An effective project manager is one who should have the following skills/capacities. 1. Planning and organizational skills 2. Personnel management skills 3. Communication skills 4. Ability to solve problems in their totality 5. Ambition for achievement 6. Ability to take suggestion 7. Understanding the views of project team members and having a sympathetic attitude towards them 8. Ability to develop alternative actions quickly 9. Ability to make self-evaluation

10. Effective time management 11. Initiative and risk taking ability 12. Conflict resolving capacity 13. Team building skills 14. Resource allocation skills 15. Entrepreneurial skills

1.2 PROJECT LIFE CYCLE:

Each project is a unique entity. It has a beginning, a life, and an end. Thus it is born, it develops, and it dies. Like human beings, projects are taken to living organisms blessed with life-cycles. Companies performing projects will generally subdivide their projects into several phases or stages to provide better management control. Collectively these project phases are called the project life cycle. The period between the beginning and end of a project is usually referred to as the project life cycle. Project life cycles generally define: What technical work should be done in each phase? Who should be involved in each phase? A particular project receives is not uniformly distributed throughout its life span, but varies from phase to phase. At a particular phase of project life, depending on the requirement of that phase, appropriate attention has to be paid. We, therefore, need to know the various phases in the life of a project.

A). Conceptual phase: This is the first phase of the project life cycle. This phase involves the identification of a need,idea, problem or opportunity. The idea may first come to the mind when one is seriously trying overcome certain problems. The problems may be non-utilisation of either the availability of funds, plant capacity etc. Many projects are facing diffculties in this phase because the concept phase is truncated(or cut off) before it is finished and attention is prematurely turned towards the means of accomplishing objectives. Therefore, project objectives need to be fully explored and developed in the conceptual phase. The major activities of this phase is: i) Determine existing needs or potential reqirement of current projects. ii) Provide initial answers to the question on cost, avaiability, performance levels and its compatibility to other project programmes. iii) Identify all the resources essential for the effective management . iv) Determine initial project interface. v) Design an appropriate organisation structure for the project.

B). Definition phase:

In this phase, solutions to business opportunity are evaluated and the preferred approach is defined. This phase includes initial preparation of all documentation necessary to support the project such as., policies, procedures, job description, budget and funding papers, letters etc. Thus the definition phase represents a beginning-to-end thinking through the project but does not accomplish the project in and of itself. The project definition produces a plainly written, unambiguous description of the project in sufficient detail to support a proposal or request the customer for undertaking the overall project. This phase includes following activities: i) ii) Preparing of the detailed plans required to support the project. Estimation of realistic cost, schedule and performance requirements

iii) iv) v)

Spotting out those areas of the project where high risk and uncertainty exist. Defining, interfacing and of project activities. Ascertaining other necessary sub-systems of the projects.

C. Planning and organising phase:

In this phase, the detailed plans are prepared and tasks are identified, with appropriate milestones, budgets and resources. Planning consists of defining all the works required to be carried out so that all the project participants will understand their role in the project team and carry out the work assigned to them. Some organisation however, prepare documents such as project execution plan to mark this phase. Organizing is the process of defining and analyzing the activities of the enterprise, grouping the activities into distinct areas / departments and establishing the authorityresponsibility relationships among them. It also involves organizing the resources required for the accomplishment of organizational objectives. In project environment, organizing consists of the following sub processes. Following activities are of major concern in this phase: i) Defining the scope of the project in terms of the product/services to be delivered by the project. ii) Forecasting and estimating the resources (men, material, money, machines etc.,) required for the project. iii) iv) Arriving at an appropriate organisational structure to implement the project. Identification and management of the resources in order to facilitates the production processes such as inventory, supplies, labour, funds, etc. v) vi) Preparing detailed cost estimates for all the activities. Determining the required resources for all the activities.

D. Perform the project:

This is the third phase where the project plan is carried out. It is being concerned with operations; it integrates the projects product or services into existing organizational system. Project management activity during this phase involves:

Keeping people informed about progress of the project, ensuring project priorities are understood and translated into which activities are "in progress."

Monitoring the environment, anticipating problems and taking action to counter any issues affecting the project scope, schedule or budget.

Reviewing change requests with the project team and recommending whether they will be done within the project or not.

Evaluation of the technical, social and economic sufficiency of the project to meet actual operating conditions.

E. Terminate the project:

The project process is completed and documented, and the finished product is transferred to the care and control of the owner. In this phase project will shut down in a controlled manner. The major activities of the project in this phase are: Demonstrate that the project is complete Arranging relevant project files in proper form so that they can be referred for future projects. Assess the success of the project Ensuring that project accounts are maintained up-to-date, amply audited and closed out. Assisting project staff in being reassigned. Discharging any outstanding dues on behalf of project. Collecting dues of fees or payments from the clientele and clearing the account. Support departing staff

This phase is quite relevant under multi-project environment. When one project gets completed the resources can be put to use in other subsequent project. This final phase has an impact on other ongoing projects with regard to priority identification.

1.3

PROJECT MANAGEMENT

Meaning: Project management is the scientific application of knowledge, skills, tools,

and techniques to project activities to meet project requirements. It is an organized venture for managing projects. In other words, project management is the facilitation of the

planning, scheduling and controlling of all activities that must be done to achieve project objectives within constraints of time and cost. Project management is essentially involved in executing the projects. It involves applying a systematic approach to achieve the objectives of the project, and when project management is done properly, the probability of a successful outcome to the project is increased. According to Herold Kerzner, project management is planning, directing and controlling of company resources for a relatively short term project which has been established for the completion of specific goals.

Characteristics of Project Management:

Successful project management has several significant characteristics. To understand the value of project management, it is necessary to understand the fundamental nature and the core characteristics of project management processes. 1. The undertaking ends with a specific accomplishment. 2. The required activity has a beginning, an end, and a schedule for completion. 3. Resources are limited. 4. People are involved. 5. Phases and activities are sequenced. Objectives of Project Management: o define the project o reduce it to a set of manageable tasks

o obtain appropriate and necessary resources o build a team or teams to perform the project work o plan the work and allocate the resources to the tasks o monitor and control the work o report progress to senior management and/or the project sponsor o close down the project when completed o review it to ensure the lessons are learnt and widely understood

Benefits/ Needs / Importance of project Management:

Project management provides techniques for making trade-offs between conflicting goals and enterprise priorities besides experiencing a better control and coordination. It also helps in reducing developmental time lowering costs, and produces higher order results. Other major benefits of project management techniques include the following: 1. Better efficiency in delivering services: Project management provides a roadmap that is easily followed and leads to project completion. 2. Application and use of set tools and Techniques: It provides a set of tools and techniques at will set out possible mechanisms for the management of project through the various stages of its life-cycle. 3. Better Flexibility: It is one of the greatest benefits of project management is that it allows for flexibility. Project management allows mapping out the strategy. For many small-to-midsize companies, this alone is worth the price of admission. 4. Reducing risks: The project management team can identify the potential risks, take their time to rectify them and help the company save valuable resources. 5. Highlight the role of project Manager: It is useful to highlight the role of project manager in the organization and management of people. 6. Performance Evaluation: It is useful to specify world class performance and to take generic lesson from these.

7. Excellent product quality: The project management plans the allocated budget, resources and testing methods that keep the pace of production high, both qualitatively and quantitatively. 8. Fast track: Bring a new product to the market quickly before your competitors. 9. Project office: Offers a centre for project management excellence. It can be concluded that project management as a management discipline, individual competency, organizational culture and a critical source of multiple advantages. The specialized role of project management in bringing agility to organizations that want to innovate, whether it is for new products or new initiatives, cannot be ignored.

Project management process:

Project management is a process of leading a team in planning and implementing a series of related activities that need to be accomplished on a specific date with a limited budget. Because of its nature, coordinating all these activities requires a process approach. Because many times development project take on unexplored territory, assumptions about the project must be listed, evaluated, its risks assessed and contingency plans developed. It also requires a close monitoring of the budget, scope and schedule to deliver the project objectives under the expected quality. Each one of these elements needs to be managed in a systematic manner with the development of plans to identify the roles and resources needed. A project manager sees to it that everything goes well as planned and if problems may arise as they usually do, a resolution is immediately implemented. To be able to create a successful project, one must go through the project management steps carefully completing each and every project management phases. All projects have to pass through the following five phases:

A. Project Initiation:
Project Initiation is the first phase in the Project Life Cycle and essentially involves starting up the project. In this phase a business problem (or opportunity) is identified and a business case which provides various solution options is defined. A feasibility study is conducted to investigate likelihood of each solution option addressing the business problem and a final recommended solution is forward. Once the recommended solution is approved, a project is initiated to deliver the approved solution. Generally a projects objective has fully explored and developed in this phase. The initiating stage should include a plan that encompasses the following areas:

analyzing the business needs/requirements in measurable goals reviewing of the current operations financial analysis of the costs and benefits including a budget stakeholder analysis, including users, and support personnel for the project

project charter including costs, tasks, deliverables, and schedule

B. Project Planning
The plan is the first step in providing the means of satisfying the requirements of the project owner or sponsor. In this phase, detailed plans are prepared and tasks identified, with appropriate milestones, budgets and resources. Many of the decisions and actions taken during this phase relate to project basics, and if the project jumps into the execution phase without freezing the basics, the project is bound to be flounder. The primary objectives of the planning phase are:

determining how to plan (e.g. by level of detail or rolling wave); developing the scope statement; selecting the planning team; identifying deliverables and creating the work breakdown structure; identifying the activities needed to complete those deliverables and networking the activities in their logical sequence;

estimating the resource requirements for the activities; estimating time and cost for activities; developing the schedule; developing the budget; risk planning;

C. Project Execution
The execution phase is typically the longest phase of the project (in terms of duration). Executing consists of the processes used to complete the work defined in the project plan to accomplish the project's requirements. Execution process involves coordinating people and resources, as well as integrating and performing the activities of the project in accordance with the project management plan. Though the project execution shall as far as possible be done according to the plans originally envisaged, changes / modifications required, if any,

are to be incorporated wherever necessary. Since projects are dynamic in nature, flexibility is essential in execution of projects so that the overall objectives of the project are achieved.

D. Monitoring and controlling:

Monitoring and controlling consists of those processes performed to observe project execution so that potential problems can be identified in a timely manner and corrective action can be taken, when necessary, to control the execution of the project. Monitoring and controlling includes: Measuring the ongoing project activities ('where we are'); Monitoring the project variables (cost, effort, scope, etc.) against the project management plan and the project performance baseline (where we should be); Identify corrective actions to address issues and risks properly (How can we get on track again); Influencing the factors that could circumvent integrated change control so only approved changes are implemented.

E. Project Closure:
Projects are temporary endeavors. Hence, they have a beginning and an end. A project comes to an end when the execution is completed and the project objectives are fulfilled. At this point, the project needs to be brought to an end, or closed down. Its resources, both people and technology, need to be released and reallocated. The project should be allowed to close, and a final meeting for the project team members ought to convene to formalise the closure. For every project there must be a formal process called closing for declaring the closure of the project.

SMART Goals in Project Management Defining SMART Goals SMART is an acronym for specific, measurable, agreed upon, realistic, and time. Project managers utilize SMART goals as a way to measure project phases and outcomes and they can also be used in any project management methodology. Specific We know we want to develop a more comfortable running shoe, but what specifically is needed to improve on whats already on the market? Do the shoes need to be lighter, heavier; are green or recycled materials important? These are all examples of specifically defining the wants of our running shoes.

Measure How will we measure our running shoesor evaluate the final product? Here you might list things such as how the shoes will be testednot only by end users but also comparison testing, costs and prices to cover manufacturing, etc. Project tracking is a big part of the measure process when using SMART goals. Not only does project tracking allow you to measure various areas of the project, managers and teams often use mind mapping tools that show how each level of the project will run, what obstacles are out there, and ways to avoid and improve on those obstacles. Consider the measure process as the largest part of your SMART goals because this stage will essentially defines how the project will flow. Agreed Upon External and internal stakeholders, teams and key personnel must all agree on what has been decided in the measurement phase. Often associated risks or changes may be identified and in our running shoe example, if a vendor cant deliver what we want for example, we may have to go back and review the measuring phase. Realistic Now is the time to see if the goals set in the project are doable and realistic. Will end users love our running shoes? Can we actually make the running shoes and continue production based on revenues and expenses? Do we indeed have everything we need to complete the project and have we set realistic goals we can actually achieve?

Time Time or time-based goals are important to define in the SMART goal project planning process. If we want our running shoes in stores by the spring/summer shopping season, will we be able to achieve this deadline? What are some of the stopping blocks we may run into? Here, we define our timeline from start to finish based on our specific wants and needs, how we plan to measure and track our success, are able to agree unilaterally, and feel realistic about the projects outcome and success.

1.4. NEEDS IDENTIFICATION Needs identification is the initial phase of the project life cycle. It starts with the recognition of needs, problems, or opportunity and ends with the issuance of a request for proposal (RFP). The customer identifies a need, a problem, or an opportunity for a better way of doing something and therefore sees some benefit to undertaking a project that will result in an improvement or advantage over the existing condition. There are often situations where a company has identified several needs but has limited funds and people available to pursue projects to address all of those needs. In such cases, the company must go through a decision-making process to select those needs that, when met, will result in the greatest overall benefits.

1.5

PROJECT SELECTION

Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved. Project selection involves evaluating various needs or opportunities, and then deciding which of these should move forward as a project to be implemented. The benefits and consequences, advantages and disadvantages, pluses and minuses of each opportunity need to be considered and evaluated. Each project will have different costs, benefits, and

risks. In the face of such differences, the selection of one project out of a set is a difficult task. Several techniques that can be used to help senior managers select projects. To deal with all of these problems, organizational decision makers use decision aiding models that permit them to save time and money while maximizing success. A number of decision models are available to managers responsible for evaluating and selecting potential projects. All firms, however, try to develop a screening model that will allow them to make the best choices among alternatives. Within the limits of their capabilities, such models can be used to increase profits, select investments for limited capital resources, or improve the competitive position of the organization. They can be used for ongoing evaluation as well as initial selection, and thus are a key to the allocation and reallocation of the organizations scarce resources.

Criteria for Choosing Project Model:

The proper selection of investment projects is crucial to the long run survival of every firm. Project selection models can be used to increase profits, select investments for limited capital resources, or improve the competitive position of the organization. So, when a firm chooses project selection model, the following criteria are most 1. Realism: The model should reflect the reality of the managers decision situation, including the multiple objectives of both the firm and its managers. Without a common measurement system, direct comparison of different projects is impossible. The model should take into account the realities of the firms limitations on facilities, capital, personnel, and so forth. 2. Capability: The model should be sophisticated enough to deal with multiple time periods, stimulate various situations both internal and external to the project (for example, strikes, interest rate changes), and optimize the decision. An optimizing model will make the comparisons that management deems important, consider major risks and constraints. 3. Flexibility: important

The model should give valid results within the range of conditions that the firm might experience. It should have the ability to be easily modified, or to be self-adjusting in response to changes in the firms environment; for example, tax laws change, new technological advancements alter risk levels, and, above all, the organizations goals change. 4. Ease of Use: The model should be reasonably convenient, not take a long time to execute, and be easy to use and understand. It should not require special interpretation, data that are difficult to acquire, excessive personnel, or unavailable equipment. Expected outcomes should be easily simulated. 5. Cost: Data gathering and modeling costs should be low relative to the cost of the project . All costs should be considered, and their total should definitely not be greater than the potential benefits of the project. 6. Easy Computerization: It should be easy and convenient to gather and store the information in a computer database, and to manipulate data in the model through use of a widely available, standard computer package such as Excel, Lotus 1-2-3, Quattro Pro, and like programs.

The Nature of Project Selection Models:

There are two basic types of project selection models, numeric and nonnumeric. Both are widely used. Many organizations use both at the same time, or they use models that are combinations of the two. Nonnumeric models, as the name implies, do not use numbers as inputs. Numeric models do, but the criteria being measured may be either objective or subjective. It is important to remember that the qualities of a project may be represented by numbers.

A.

Nonnumeric Models: Nonnumeric models are older and simpler and have only a

few subtypes to consider. Followings are subtypes of Non-numeric model. a.) The Sacred Cow: In this case the project is suggested by a senior and powerful official in the organization. The project is sacred in the sense that it will be maintained until successfully concluded, or until the boss, personally, recognizes the idea as a failure and terminates it. b.) The Operating Necessity: Here the project is required to keep the system running. If a flood is threatening the plant, a project to build a protective dike does not require much formal evaluation, is an example of this scenario. If the project is required in order to keep the system operating, the primary question becomes: Is the system worth saving at the estimated cost of the project? If the answer is yes, project costs will be examined to make sure they are kept as low as is consistent with project success, but the project will be funded. c.) The Competitive Necessity It had become essential to the company for implementation of modernization if the firm wants to maintain its competitive position in the market area. Although the planning process for the project will quite sophisticated, the decision to undertake the project is based on a desire to maintain the companys competitive position in that market. In a similar manner, many business schools are restructuring their undergraduate and MBA programs to stay competitive with the more forward-looking schools. In large part, this action is driven by declining numbers of tuition-paying students and the need to develop stronger programs to attract them. Investment in an operating necessity project takes precedence over a competitive necessity project, but both types of projects may bypass

the more careful numeric analysis used for projects deemed to be less urgent or less important to the survival of the firm. d.) The Product Line Extension: Here, projects are judged on how they fit with current product line, fill a gap, strengthen a weak link, or extend the line in a new desirable way. Decision makers can act on their beliefs about what will be the likely impact on the total system performance if the new product is added to the line. e.) Comparative Benefit Model: For this situation, assume that an organization has many projects to consider, perhaps several dozen. Senior management would like to select a subset of the projects that would most benefit the firm, but the projects do not seem to be easily comparable. The organization has no formal method of selecting projects, but members of the Selection Committee think that some projects will benefit the firm more than others, even if they have no precise way to define or measure benefit. The concept of comparative benefits, is not a formal model, but is widely adopted for selection decisions on all sorts of projects. Most United Way organizations use this concept to make decisions about which of several social programs. So, here several projects are considered and the one with the most benefit to the firm is selected

Advantages of Numeric Scoring Models Allow multiple criteria to be used for evaluation and decision. Structurally simple and easy to use. A direct reflection of management policy. Easily altered to meet changes in the environment and in management policy. Disadvantages of Numeric Scoring Models

Output is a relative measure; no utility is reflected, thus no direct indication of project support. Generally linear, elements are assumed to be independent. Tendency to include too many criteria. B. NUMERIC MODELS: A large majority of all firms using project evaluation and selection models use profitability as the sole measure of acceptability. Followings are types of Numeric models. a.) Pay-back Period: The payback period for a project is the initial fixed investment in the project divided by the estimated annual net cash inflows from the project. The ratio of these quantities is the number of years required for the project to repay its initial fixed investment. This method measures the period of time for the original cost of a project to be recovered from the additional earnings of the project itself. Under this method, various investments are ranked according to the length of their pay-back periods. Shorter pay-back period is preferred. For example, (project generates constant cash inflows). Assume a project costs Rs.100, 000 to implement and has annual net cash inflows of Rs. 25,000. Then, here payback period is 4 years. For example, (in case of unequal annual cash inflows): Assume a project which requires a cash outlay of Rs. 10,000 and generates cash inflows of Rs. 2,000, Rs.4,000, Rs.3,000 and Rs. 2,000 in the first, second, third and fourth years respectively. Here total cash outlay is Rs. 10,000 Total cash inflow for the first 3 years Rs.2,000 + Rs.4,000 + Rs. 3,000 Rs.9,000. Within third year total cost is not recovered but the total cash inflows for the four years are Rs. 9,000 + Rs.2,000 Rs.11,000 i.e., Rs.1,000 more than the cost of the project. So the back period is somewhere between 3 and 4 years. So pay-back period is:

2+ 1,000/2,000 3 years and 6 months.

Example:

A Company wishes to buy a machine for a four-year project. The manager has to choose between machine A or machine B. Although both projects have the same initial cost ($35, 000) their cash flows perform differently over the four-year period. To calculate the payback period, simply work out how long it will take to recover the initial outlay (see Table 1 below) Table 1: Year 0 1 2 3 4 Payback period Payback Period Cash-Flow Machine A ($35,000) $ 20,000 $ 15,000 $ 10,000 $ 10,000 2 years Cash-Flow Machine B ($35,000) $ 10,000 $ 10,000 $ 15,000 $ 20,000 3 years

Machine A will recover its outlay one year sooner than Machine B. Where machines are ranked by the shortest Payback period, machine A is selected in preference to machine B. b.) Average Rate of Return Method: The average rate of return is the ratio of the average annual profits(either before or after taxes) to the initial and average or average investment in the project. According to this method, various projects are ranked in order of the rate of earnings or rate of return. The project with the higher rate of return is selected as compared to the one with lower rate of return. This method can also be used to make decision as to accepting or rejecting a project. c.) Net present value Method: (or discounted cash flow technique)

The net present values of all cash inflows and an outflow occurring during the entire life of the project is determined separately for each year by discounting these flows by a predetermined rate. NPV Total present value of cash Inflows Present value of initial investment NPV is an indicator of how much value an investment or project adds to the firm. In financial theory, if there is a choice between two mutually exclusive projects, the one yielding the higher NPV should be selected. Whereas, in case of single project if the net present value is greater than zero, an investment project is acceptable, whereas, if net present value is less than zero, than project will be rejected. Whenever the net present value will be equal to zero the project will be either rejected or selected.
NPV > 0 the investment would add value to the firm the investment would subtract value from the firm the investment would neither gain nor lose value for the firm the project may be accepted

NPV < 0

the project should be rejected We should be indifferent in the decision whether to accept or reject the project.

NPV = 0

For example, given: Investment (Initial cost) = Rs. 40,000 Life of the Project = 5 Years Year 1 2 3 4 Cash Inflows 18000 12000 10000 9000

6000

Calculate Net present value at 10% . Solution: Year 1 2 3 4 5 Cash Inflows 18000 12000 10000 9000 6000 PV@10% 0.909 0.827 0.752 0.683 0.621 Total present value (-) Investment NPV PV of Net cash flows 16362 9924 7520 6147 3726 43679 40000 3679

Deducting the present value of investment from the total present value of cash inflows a net value of Rs. 3679. Here net present value is greater than zero, so the project will be selected. d.) Internal Rate of Return Method: The IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment. Under this method, the cash flows of a project are discounted at a suitable rate by hit and trial method, which equates the net present value so calculated to the amount of the investment. Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project's internal rate of return, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front

investment, the project with the highest IRR would be considered the best and undertaken first. It can be determined by the following mathematical formula: A1 + A2 + A3 + . + An 1 2 3 (1+r) (1+r) (1+r) (1+ r)n C Initial outlay at time Zero. Where, A1, A2, An = Future net cash flows at different periods. 2, 3, .,n = numbers of years r = rate of discount of internal rate of return. Advantages: i) It considers the profitability of the project for its entire economic life and hence enables evaluation of true profitability. (ii) It provides for uniform ranking of various proposals due to the percentage rate of return. Disadvantages: It is difficult to understand and is the most difficult method of evaluation of investment proposals. e.) Profitability Index: Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of present value of cash inflows to initial investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. The ratio is calculated as follows:

C=
.

Or = Present value of cash inflows Present value of cash outflows

Or = PV of cash inflows

Initial cash outlay Rules for selection or rejection of a project:

If PI > 1 then accept the project If PI < 1 then reject the project This various projects are ranked under this method in order of their profitability

index, in such a manner that in case of multiple projects, higher profitability index is ranked higher than the other with lower profitability index. Example: Investment (Initial cost) = Rs. 40,000 Life of the Project = 5 Years
Year 1 2 3 4 5 Cash Inflows 18000 12000 10000 9000 6000

Calculate Net present value and profitability index at 10% .

Solution:

Year

Cash Inflows

PV@10%

PV of Net cash flows

1 2 3

18000 12000 10000

0.909 0.827 0.752

16362 9924 7520

4 5

9000 6000

0.683 0.621

6147 3726

Total present value (-) Investment NPV

43679 40000 3679

Profitability Index = 43679 / 40000 = 1.091 As the P.I. is higher than 1, the project proposal can be accepted.

1.6 PROJECT ORGANIZATION

To manage a project, a company or authority has to set up a project organization, which can supply the resources for the project and service it during its life cycle. It refers to the differentiation and integration of activities and authority roles and relationships. While there are various types of organizations used today. Followings are the most prominent form of organizations: a.

Functional Organization Structure/ Hybrid project:

Prior to about 1960 most corporate organizations favored a functional organization structure, also called a traditional organizational structure. In this structure teams or groups are created based on common function in a bottom-up manner. This type of organization consists of specialist or functional departments each with their own departmental manager responsible to one or more directors. Such an organization is ideal for routine operations where there is little variation of the end product. Functional organizations are usually found where items are mass produced. Each department is expert at its function and the interrelationship between them is well established.

Advantage:

(ii) No structural change: structure.

Projects are handled within the existing organizational

(iii) Flexibility in the use of staff: specialists within various functional departments can be temporarily assigned to the project and then return to their normal duties within their functional departments. (iv) In depth expertise: the project can benefit from the use of experts coming from the functional units. Hence it gains potentials of the unit without duplication of scarce resources, maximizing their utilization.
Disadvantages:

(i) Lack of focus:

Because each functional unit has its own routine work and

responsibilities, the project may be given low priority. (ii) Poor integration: Specialists in functional units may be concerned only with their part of the project and not with what is best for the total project. (iii) This method does not work very effectively when used in facilitating complex

projects. (iv) Slow response: Functional units cannot respond to fast changes in customer demands

or the product since only the top level management has broad knowledge and the decision making authority.

b. Divisional Organisation structure:

Under this form of project organization, a separate division or team is set up to implement the project, where each division corresponds to the end product or services provided by the organization. Each division has own set of functional units like research, manufacturing, marketing etc and is completely self contained. Headed by the project manager, this

division has its complement of personnel over whom the project manager has full line authority. He recruits necessary people from both within and outside the organization. In effect, this form of organization implies the creation of a separate goal- oriented division of the company, with its own functional departments. It is less hierarchical and formed by decomposing the functional structure along with product lines.

Advantages:

(i) Very strong form of project organization. (ii) The divisional project organization facilitates the process of planning and control.

(iii) Fast: Full attention to the project makes it possible to complete the project as soon as possible. (iv) Cohesiveness: team members share a common goal which results in a high level of motivation and togetherness. (v) Integration: It brings about better integration of efforts. (vi) Coordination: It helps in departmental coordination.

Disadvantages:
(i) Inefficient of resources: This form of organization, however, may entail an

inefficient use of the resources of the firm. (ii) Internal strike: A dispute can develop between the project team and the parent organization. (iii) Limited Technological Expertise: Technical expertise is limited to the talents and experience of the specialists assigned to the project. (iv) Difficult product integration: when organization produces multiple products which might be used together or are part of a larger product, the integration task becomes challenging since there is little coordination between the divisions. (v) Expensive for small projects

c. Matrix Organization Structure:

Matrix Organization is a project management structure that evolved from the recognition of inherent flaws in the Functional Organization and Divisional Organization structures. Created in the 1970s, this structure combined the best components of these two structures. A Matrix structure organisation contains teams of people created from various sections of the business. These teams will be created for the purposes of a specific project and will be led by a project manager. Often the team will only exist for the duration of the project and matrix structures are usually deployed to develop new products and services. In a matrix organization, each project manager reports directly to the vice president and the

general manager. Since each project represents a potential profit centre, the power and authority used by the project manager come directly from the general manager. Different Matrix Forms: Functional (also Weak or Lightweight) Form Matrices in which the authority of the functional manager predominates and the project manager has indirect authority Balance (or Middleweight) Form The traditional matrix form in which the project manager sets the overall plan and the functional manager determines how work to be done Strong (Heavyweight) Form Resembles a project team in which the project manager has broader control and functional departments act as subcontractors to the project. Typical Matrix organization

Advantages:

(i) Efficient:

Resources can be shared with multiple projects as well as within

functional units. (ii) Strong Project Focus: As compared to functional project setup, this enables a strong project focus by having a formally designated project manager. (iii) Flexibility: Matrix structure makes possible the flexible utilization of resources of resources and expertise within the organization since the boundaries between the project team and the functional units are not so strict. (iv) Because key people can be shared, the project cost is minimized. (v) Stress is distributed among the team. (vi) Efficient use of support system.
Disadvantages:

(i)

A conflict of loyalty between line managers and project managers over the allocation of resources.

(ii) (iii)

Projects can be difficult to monitor if teams have a lot of independence. Costs can be increased if more managers (i.e. project managers) are created through the use of project teams

(iv)

Slow:

Decision making becomes a slow process when various functional

departments and project groups have to come to an agreement. (v) Infighting: In matrix form, resources, people and equipment are being shared by various projects and functional tasks, conflict and competition is unavoidable.

1.6

PROJECT FEASIBILITY ANALYSIS:

A Project feasibility study is defined as an evaluation or analysis of the potential impact of a proposed project or program. It is conducted to assist decision-makers in determining whether or not to implement a particular project or program. It involves documenting each of the potential solutions to a particular business problem or opportunity of a project.

The purpose of a Feasibility Study is to identify the likelihood of one or more solutions meeting the stated business requirements. In other words, if you are unsure whether your solution will give the outcome which you want, then a Project Feasibility Study will help gain that clarity. Followings are some of the feasibility steps on assessing a project. Feasibility Study Steps:

Project Description Identify the project name and purpose. Include details including stakeholders, and end result expected. Goals List long and short-term goals and what processes will be needed to achieve those goals. Timeline What will be the estimated time until project completion? Costs and Budgeting Include all costs incurred for the project including the cost of the feasibility study itself. Market Analysis If applicable, will the market or market environment benefit from the project. If so, list out. Resources Identify all the resources both IT, technical, inventory, and human that will be needed to complete the project. Project Process How will the project flow? Include flow charts showing project stages. Management and Teams Who will manage and who will work on scheduled tasks? Will project management outsourcing be needed? Observations Statements that do or dont support the project should be included here.

Before making a final decision to take up a project, the technical, economic, commercial and financial justification of the chosen project shall be ascertained in concrete terms. a.) Technical feasibility: Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The availability of the raw materials, power, sanitary and sewerage services, transportation facility, skilled man

power, engineering facilities, maintenance, local people etc are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, and risk minimization process and to get approval. Technological feasibility is carried out to determine whether the company has the capability, in terms of software, hardware, personnel and expertise, to handle the completion of the project. b). Economic feasibility: This involves the feasibility of the proposed project to generate economic benefits. A benefit-cost analysis and breakeven analysis technique is required on evaluating the economic feasibility of a project. How far the project contributes to the development of the sector, industrial development, social development, maximizing the growth of employment, etc. are kept in view while evaluating the economic feasibility of the project. In simple terms, economy feasibility is a cursory examination as to whether the investment made on the project will give a satisfactory return to the economy. c.) Commercial feasibility: In the commercial feasibility many factors are coming. The scope of the project in market or the beneficiaries, customer friendly process and preferences, future demand of the supply, effectiveness of the selling arrangement, latest information availability an all areas, government control measures, etc. The feasibility involves the assessment of the current market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into.

d). Financial feasibility: One of the very important factors that a project team should meticulously prepare is the financial viability of the entire project. The financial feasibility examines the workability of project proposal in respect of raising finance to meet the investment required for the project, be it equity, (by way of public issue of shares or by other means) or debt, (by way of term

loans from financial institutions or by other means). In case of a new project, financial viability can be judged on the following parameters:

Total estimated cost of the project Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost

Existing investment by the promoter in any other business Projected cash flow and profitability Investment outlay and cost of project Calculations of cost of debt Projected profitability Break- even point Cash flows of the project Cost of procuring capital Projected financial position

e.) Environmental Feasibility: Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc. This is an aspect worthy of real attention in the very early stages of a project. Concern must be shown and action must be taken to address any and all environmental concerns raised or anticipated. This component also addresses the ability of the project to timely obtain and at a reasonable cost, needed permits, licenses and approvals.