Module I

Project Management; Meaning, Characteristics and importance project management;

Classification of Projects, Project Life Cycle and its Phases- identification, formulation and
implementation. Appraisal of Projects – market feasibility, technical feasibility, financial
feasibility – feasibility report. Financial Appraisal of a Project – Project Evaluation Techniques –
traditional and modern (theory only).

Project

Project is a temporary endeavour undertaken to create a unique product, service or result.

A project is defined as a sequence of tasks that must be completed to attain a certain outcome.
According to the Project Management Institute (PMI), the term Project refers to “any temporary
endeavor with a definite beginning and end”.

Characteristics of a project

A project is a set of interdependent tasks that have a common goal. Projects have the
following characteristics:

1. A clear start and end date – There are projects that last several years but a project cannot
go on forever. It needs to have a clear beginning, a definite end and an overview of what
happens in between.

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 2. A project creates something new – Every project is unique, producing something that did
not previously exist. A project is a one-time, once-off activity, never to be repeated exactly
the same way again.
3. A project has boundaries – A project operates within certain constraints of time, money,
quality and functionality.
4. A project is not business as usual – Projects are often confused with processes. A Process
is a series of routine, predefined steps to perform a particular function. It’s not a one-off
activity. It determines how a specific function is performed every single time.

Types of projects

Projects can be diverse in the ways in which they are implemented. Here are some
examples of projects:

• Traditional projects: These are run sequentially in phases. These phases are typically
initiation, planning, execution, monitoring, and closure. Most high-cost infrastructure
projects make use of traditional project management.
• Agile projects: Agile projects are software development projects that focus on continuous
releases and incorporating customer feedback.
• Remote projects: Remote project management is usually used by distributed teams that
seldom meet in person. Handling freelance contributors is an example of a remote project.
• Agency projects: Agency projects are outsourced to an agency that is likely to have
projects with multiple clients. Marketing and design projects are commonly outsourced to
agencies.

Classification of Projects
The projects can be classified into various types:
(1) Based on Ownership

(a) Public Projects: These are the projects which are done by public projects. E.g.
Construction of Roads & Bridges, Adult Education Programmes, etc.

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 (b) Private Projects: These are the projects which are undertaken by private
enterprises. Eg. Any business related projects such as a construction of houses by
real estate builders, software development, marriage contracts, etc.

(c) Public Private Partnerships: These projects which are undertaken by both
government and private enterprises together. E.g., Generation of Electricity by
Windmill, Garbage Collection, etc.

(2) Based on Investment

(a) Large Scale Project: These projects involve a huge outlay or investments, say,
crores. Eg. Real Estate Projects, Road Construction of manufacturing facilities,
Satellite sending projects of ISRO, Unique Identification Number project of India,
etc.

(b) Medium Scale Project: These projects involve medium level investment and
are technology oriented. Example: Computer industry and electronic industry.

(c) Small Scale Project: These projects involve only a lesser investments. E.g.,
agricultural projects, manufacturing projects.
(3) Based on Research in Academia
(a) Major Projects: In academia, the major projects are those projects which
involve more than one year to 3 or 5 years and minimum funding of Rs. 3 lakhs in
case of social sciences and Rs. 5 lakh in case of sciences.
(b) Minor Projects: The minor projects in academia are those projects which will
be completed within a year and have a maximum funding of Rs. 1 lakh in social
science and Rs. 3 lakh in case of sciences.
(4) Based on Sector
(a) Agricultural Projects: These are the projects which are related to
agricultural sector like irrigation projects, well digging projects, manuring
projects, soil upgrading project, etc.
(b) Industrial Projects: These are the projects which are related to the industrial
manufacturing sectors like cement industry, steel industry, textile industry, etc.

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 For example, technology transfer project, marketing project, capital issue project
like IPO, etc.

(c) Service Projects: These are the projects which are related to the services
sectors like education, tourism, health, public utilities, etc. For example, adult
literacy project, medical camp, general health check up camp, etc.

(5) Based on Objective

(a) Commercial Projects: These projects are undertaken for commercial
purpose and return on investment is expected out these projects. For example,
Toll roads based on BOLT – Build Own Lease Transfer Model or BOOT – Build
Own Operate and Transfer Model.
(b) Social Projects: These projects are undertaken for social purposes and
welfare of the people is the aim of these projects. These projects are undertaken
either by the Government or Service oriented Non-Governmental Organizations.
For example, Polio immunization Project, Child Welfare Projects, Adult
Literacy Projects, etc.
(6) Based on Nature

(a) Conventional Projects: These projects are traditional projects which do not
apply any innovative ideas or technology or method. For example, conventional
irrigational projects, handicraft projects, etc.

(b) Innovative Projects: These projects involve the use of technology, high
R&D, development of new products and services etc.
(7) Based on Functions Based on the functional area of management, the projects can be
classified into:
(a) Marketing Projects which are taken up in the area of marketing a product
or service of an organization. Marketing road shows, implementing a marketing
strategy, etc.
(b) Financial Projects are undertaken to raise finance or restructure capital
structure. For example, IPO Project, share split project, etc.

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 (c) Human Resources Projects are undertaken in the area of human resources
of an organization, e.g., Induction training project, campus recruitment project,
etc.
(d) IT and Technology Projects which are undertaken in the area of IT
companies or IT related requirement of any organization, e.g., development of
Human Resources Information System, Marketing Information System, etc.
(e) Production Projects are undertaken in the area of production or operations.
For example, overhauling projects, preventive maintenance projects, getting an
ISO certification, etc.
(f) Strategic Projects are taken by the organizations to executive a strategy, for
example, mergers and acquisition projects, Core Banking Solution project
introduced in banks, etc.
(9) Based on Risk
(a) High Risk Projects: These projects involve a very high degree of risk, for
example, nuclear energy project, thermal energy project, satellite projects, etc. If
the project is not handled properly, the effect will be very adverse. Thus, high
precautionary measures are to be taken to commission these projects.
(b) Low Risk Projects: These projects do not involve risk and they are carried
out in the normal course of action. For example, road and bridge construction,
house construction.
Project life cycle
Often, projects are divided into five project phases each of which comes with a distinct set
of tasks, objectives, and a particular deadline. Dividing a project into different phases enables
teams to stay on track throughout their entire life cycle.
1. Initiation
The first phase in a project’s life cycle is called project initiation. Here, a project officially
launches. It is named and a broad plan is defined. Goals are identified, along with the project’s
constraints, risks, and project team. At this point, memebers decide if they want to commit to the
project. Depending on the project, studies may be conducted to identify its feasibility. For IT
projects, requirements are usually gathered and analyzed during the initiation phase.
2. Planning

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 A roadmap that will guide teams from creating a project plan throughout the project’s
execution and closure phases is developed comprehensively during the planning stage. Deadlines
must be set and resources must be allotted. Breaking down tasks into smaller, manageable
activities makes it easier to manage project risks, costs, quality, time, and so on. At the same
time, breaking down tasks into digestible pieces will empower everyone involved to accomplish
the project on time and stay within budget.
3. Execution
The execution phase is where the actual work of the project takes place. Project team
members perform the tasks and activities outlined in the project plan, and the project manager
oversees the work to ensure it aligns with the project's objectives and quality standards. Effective
communication and coordination are essential during this phase. The project execution phase is a
critical point in a project’s life cycle as it will help everyone determine if their efforts will
ultimately be fruitful or not.
4. Monitoring and Controlling
Throughout the project, project managers and teams continuously monitor progress and
performance against the project plan. They identify and address issues, risks, and changes as they
arise. The monitoring and controlling phase ensures that the project stays on track and within its
defined constraints. If unforeseen issues arise, the project manager may have to make adjustments
to the plans, as well as the project schedule.
5. Closing
The closing phase occurs once the project's objectives have been achieved, and all project
work is completed. This phase involves formally closing out the project, obtaining stakeholder
acceptance, releasing project resources, conducting project reviews, and archiving project
documentation. It also includes lessons learned to improve future projects.

Meaning of Project Management

Project management refers to the systematic application of knowledge, skills, tools and
techniques to initiate, plan, execute, monitor, control and close a project. The primary goal of
project management is to meet or exceed stakeholder expectations and deliver the project on time,
within budget, and with the specified scope and quality. It involves coordinating various resources,
including people, materials, equipment and technology to achieve project objectives.

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 It is the responsibility of the Project Manager to efficiently manage all activities concerned
with the implementation of new projects in the organisation. Project management is a critical
discipline that involves planning, organizing, executing and controlling resources and activities to
achieve specific project objectives within defined constraints, such as time, budget and quality. It
plays a crucial role in various industries and sectors, as it helps organizations effectively complete
projects and deliver desired outcomes.

Characteristics and Importance of Project Management

1. Temporary: Projects are temporary in nature. Every project has a beginning and end. The word
‘temporary’ here may refer to an hour, a day or a year. Operational work is an ongoing effort which
is executed to sustain the business. But projects are not ongoing efforts. A project is considered to
end when the project’s objectives have been achieved or the project is completed or discontinued.
Only projects are temporary in characteristic and not the project’s outcomes. It will not generally
be applied to the product, service or result created by the project. Projects also may often have
intended and unintended social, economic and environmental impacts that long last.

2. Definite Beginning and Completion: Project is said to be complete when the project’s
objectives have been achieved. When it is clear that the project objectives will not or cannot be
met the need for the project no longer exists and the project is terminated. Thus, projects are not
ongoing efforts. Thus, every project has a definite beginning and end.

3. Definite Objective/Scope and Unique: All the projects have their own defined
scopes/objectives for which they are carried out. Every project is undertaken to create a unique
product, service, or result. E.g., Hundreds of house buildings may have been built by a builder, but
each individual building is unique in itself like they have different owner, different design,
different structure, different location, different sub-contractors, and so on. Thus, each house
building is to be considered as a Project and each Project produces unique outcome.

4. Defined Time and Resources: As the projects have definite beginning and end, they are to be
carried out within the time and resources constraints. Each project will have defined time and
resources for its execution.

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5. Multiple Talents: As projects involve many interrelated tasks done by many specialists, the
involvement of people from several departments is very much essential. Thus, the use of multiple
talents from various departments (sometimes from different organizations and across multiple
geographies) becomes the key for successful project management. For example, take the
construction of house building; the expertise of very many professionals and skills of various
people from various fields like architect, engineers, carpenters, painters, plumber, electrician,
interior decorator, etc, are being coordinated to complete the house project.

Scope of Project Management

Organisations do not immediately implement a project after finalizing the project idea. Once a
project idea is proposed, several aspects of the project including project goals, project deliverables,
requirement of resources, time frame, etc. need to be finalized and documented. This is where
project scope comes into picture.

Project scope is the breadth of a project providing details about how much a business would
be affected, what resources are required, how much time the project would take to complete, etc.
The bigger the project, the more details and planning are needed to successfully bring the project
to fruition.

Project scope is a part of project planning involving the process of setting project goals,
identifying processes, assigning tasks and allocating resources. Defining a project scope is
necessary for setting a stage for project plan development, which needs to be done by elaborating
on the collaborative efforts of the project manager and the customers.

Project Objectives

The objectives of a project are documented in project scope. Project objectives refer to the
aims of a particular project. As discussed earlier, all projects have specific objectives. For
example, the objective of a product to launch a new product would be to capture certain percentage
of market share in a particular region. The project objectives are discussed below.

Deliverables

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 These are tangible or intangible outcomes to be achieved on the completion of a project. A
tangible outcome can be an item or article while an intangible outcome refers to services delivered
to customers or other beneficiaries. For example, a product is the tangible outcome of a product
development project. On the other hand, accommodating more passengers is an intangible outcome
of a project for construction of a new airport terminal.
Milestone
These are significant events that may occur at a point of time during the project. Milestones
indicate the direction of the project and ensure that project activities are performed according to
the schedule. For example, different milestones in a product development project could be to
generate a product idea, create a product prototype, develop a product, test the market, collect
feedback, and launch the product. An organisation could set different time frames to achieve these
milestones.
Technical Requirements
These refer to the technical specifications for accomplishing project tasks and activities,
such as speed and capacity of database systems.

For example, the AADHAR card project started by the government of India involves
various technical requirements, such as equipment for taking finger prints, retina images and
reliable data storage systems for storing personal information of Indian citizens.

Limits and Exclusions

Limits of project scope outline the borders of project by describing what the project could
not achieve. For example, a project on ‘safe drinking water for all’ project may be limited to certain
districts of a state. This is the geographical limit of the project. Exclusions of a project outline the
elements that are beyond the scope of the project. For example, poverty eradication project of the
government would exclude the affluent sections of the society.

Constraints and Risks

Constraints of a project describe the limitations of resources for accomplishing a project.
For example, projects are required to be executed with a given budget; thus, budgets act as
constraints in a project. Similarly, unavailability of skilled labour or equipment could act as project

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constraints. Risks refer to the deviations of the actual outcome from the expected outcome. The
higher the probability of a project to achieve its objectives, the lower would be the level of risks
involved. However, different projects involve different risk levels.

Project Life Cycle and Its Phases

Every project, from conception to completion, passes through various phases of a life cycle
synonym to life cycle of living beings. There is no universal consensus on the number of phases
in a project cycle. An understanding of the life cycle is important to successful completion of the
project as it facilitates to understand the logical sequence of events in the continuum of progress
from start to finish. Typical project consists of four phases- Conceptualization, Planning,
Execution and Termination. Each phase is marked by one or more deliverables such as Concept
note, Feasibility report, Implementation Plan, HRD plan, Resource allocation plan, Evaluation
report etc.

➢ Conceptualization Phase: Conception phase, starting with the seed of an idea, it covers
identification of the product/service, Pre-feasibility, Feasibility studies, Appraisal and
Approval. The project idea is conceptualized with initial considerations of all possible
alternatives for achieving the project objectives. As the idea becomes established a proposal
is developed setting out rationale, method, estimated costs, benefits and other details for
appraisal of the stakeholders. After reaching a broad consensus on the proposal the feasibility
dimensions are analysed in detail.

➢ Planning Phase: In this phase the project structure is planned based on project appraisal
and approvals. Detailed plans for activity, finance, and resources are developed and
integrated to the quality parameters. In the process major tasks need to be performed in this
phase are

• Identification of activities and their sequencing

• Time frame for execution
• Estimation and budgeting

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 • Staffing
A Detailed Project Report (DPR) specifying various aspects of the project is
finalized to facilitate execution in this phase.

➢ Execution Phase: These phase of the project witnesses the concentrated activity where
the plans are put into operation. Each activity is monitored, controlled and coordinated to
achieve project objectives. Important activities in this phase are

• Communicating with stakeholders

• Reviewing progress
• Monitoring cost and time
• Controlling quality

• Managing changes

➢ Termination Phase: This phase marks the completion of the project wherein the agreed
deliverables are installed and project is put in to operation with arrangements for follow-up
and evaluation

Project Identification and Formulation

A project in the economic sense directly or indirectly adds to the economy of the Nation.
However an introspection of the project performance clearly indicates that the situation is far from
satisfactory. Most of the major and critical projects in public sector that too in crucial sectors like
irrigation, agriculture, and infrastructure are plagued by tremendous time and cost overruns. Even
in the private sector the performance is not all that satisfactory as is evident from the growing
sickness in industry and rapid increase in non-performing assets (NPAS) of Banks and Financial
Institutions. The reasons for time and cost over runs are several and they can be broadly classified
under-technical, financial, procedural and managerial. Most of these problems mainly stem from
inadequate project formulation and haphazard implementation.

Project Identification

Project identification is an important step in project formulation. These are conceived with the
objective of meeting the market demand, exploiting natural resources or creating wealth. The

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project ideas for developmental projects come mainly from the national planning process, where
as industrial projects usually stem from identification of commercial prospects and profit potential.
As projects are a means to achieving certain objectives, there may be several alternative projects
that will meet these objectives. It is important to indicate all the other alternatives considered with
justification in favour of the specific project proposed for consideration. Sectoral studies,
opportunity studies, support studies, project identification essentially focuses on screening the
number of project ideas that come up based on information and data available and based on expert
opinions and to come up with a limited number of project options which are promising.

Project Formulation

“Project Formulation” is the processes of presenting a project idea in a form in which it can be
subjected to comparative appraisals for the purpose of determining in definitive terms the priority
that should be attached to a project under sever resource constraints. Project Formulation involves
the following

❖ Opportunity Studies

An opportunity study identifies investment opportunities and is normally undertaken at

macro level by agencies involved in economic planning and development. In general opportunity
studies there are three types of study – Area Study, sectoral and Sub-sectoral Studies and Resource

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Based Studies. Opportunity Studies and Support studies provide sound basis for project
identification.

❖ Pre feasibility Studies / Opportunity Studies

A pre-feasibility study should be viewed as an intermediate stage between a project opportunity

study and a detailed feasibility study, the difference being primarily the extent of details of the
information obtained. It is the process of gathering facts and opinions pertaining to the project.
This information is then vetted for the purpose of tentatively determining whether the project idea
is worth pursuing furthering. Pre feasibility study lays stress on assessing market potential,
magnitude of investment, technical feasibility, financial analysis, risk analysis etc. The breadth
and depth of pre feasibility depend upon the time available and the confidence of the decision
maker. Pre feasibility studies help in preparing a project profile for presentation to various
stakeholders including funding agencies to solicit their support to the project. It also throws light
on aspects of the project that are critical in nature and necessitate further investigation through
functional support studies.

Support studies are carried out before commissioning pre feasibility or a feasibility study
of projects requiring large-scale investments. These studies also form an integral part of the
feasibility studies. They cover one or more critical aspects of project in detail. The contents of the
Support Study vary depending on the nature of the study and the project contemplated. Since it
relates to a vital aspect of the project the conclusions should be clear enough to give a direction to
the subsequent stage of project preparation.

❖ Feasibility Study

Feasibility Study forms the backbone of Project Formulation and presents a balanced
picture incorporating all aspects of possible concern. The study investigates practicability, ways
of achieving objectives, strategy options, methodology, and predict likely outcome, risk and the
consequences of each course of action. It becomes the foundation on which project definition and
rationale will be based so that the quality is reflected in subsequent project activity. A well
conducted study provides a sound base for decisions, clarifications of objectives, logical planning,
minimal risk, and a successful cost effective project. Assessing feasibility of a proposal requires

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understanding of the STEEP factors. These are as under Social, Technological, Ecological,
Economic, and Political.

The project feasibility studies focus on

✓ Economic Analysis
✓ Technical Analysis
✓ Market Analysis
✓ Financial Analysis
✓ Economic Benefits
✓ Project Risk and Uncertainty
✓ Management Aspects
a) Economic and Market Analysis
In market analysis a number of factors need to be considered covering – product
specifications, pricing, channels of distribution, trade practices, threat of substitutes,
domestic and international competition, opportunities for exports etc.
b) Technical Analysis
The technology chosen should also keep in view the requirements of raw materials and
other inputs in terms of quality and should ensure that the cost of production would be
competitive. The technology chosen should also keep in view the requirements of raw
materials and other inputs in terms of quality and should ensure that the cost of production
would be competitive.
c) Environmental Impact Studies:
The environmental impact studies would facilitate providing necessary remedial
measures in terms of the equipment’s and facilities to be provided in the project to comply
with the environmental regulation specifications.

c) Financial Analysis
The Financial Analysis examines the viability of the project from financial or commercial
considerations and indicates the return on the investments.
Financial analyses are as follows.

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 • Pay-back period.
• Return on Investment (ROI)
• Net Present Value (NPV)
• Profitability Index (PI)/Benefit Cost Ratio
• Internal Rate of Return (IRR)
e) Risk and Uncertainty
Risk and Uncertainty are associated with every project. Risk is related to occurrence of
adverse consequences and is quantifiable. It is analyzed through probability of occurrences.
f) Economic Benefits
The economic benefits include employment generation, economic development of the area
where the project is located, foreign exchange savings in case of import substitutes or earning of
foreign exchange in case of export-oriented projects and others.
g) Management Aspects
Management aspects are becoming very important in project feasibility studies. The
management aspects cover the background of promoters, management philosophy, the
organization set up and staffing for project implementation phase as well as operational phase, the
aspects of decentralization and delegation, systems and procedures, the method of execution and
finally the accountability.
❖ Time Frame for Project Implementation
The feasibility study also presents a broad time frame for project implementation. The time
frame influences preoperative expenses and cost escalations which will impact the profitability
and viability of the project.
Feasibility Report

`Based on the project report is prepared to facilitate project evaluation and appraisal and
investment decisions. A feasibility report is an investment proposal based on certain information
and factual data appraising the project. This type of feasibility study may be required by the
financing institutions, project sponsor, and project owner. The feasibility report enables the project
holder to know the inputs required and if rightly prepared confirms to the convictions that he is
proceeding in the right direction. In other words, a project needs to be fully defined in order to
provide terms of reference for the management of the project.

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Format of Feasibility Report
The sketch of feasibility report of project is given below:
1. Introduction

2. Summary and Recommendations

3. Product- Capacity, Chemistry, specifications, properties, application and uses.
4. Market potential
5. Process and know-how
6. Plant and machinery
7. Location of the unit
8. Plot plan and building
9. Raw materials availability
10. Utilities, requirements
11. Effluent’s treatment

12. Personnel requirement

13. Capital cost
14. Working capital
15. Mode of finance
16. Manufacturing cost

17. Financial analysis

18. Implementation schedule.
Check List for Feasibility Report
The following key elements must be presented in the feasibility report.
1. Examination of public policy with respect to the industry project
2. Broad specification of outputs and alternative techniques of production.

3. Listing and description of alternative locations

4. Preliminary estimates of sales revenue, capital costs and operating costs of different
alternatives
5. Preliminary analysis of profitability for different alternatives.

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 6. Marketing analysis
7. Specification of product pattern and product price
8. Raw material investigation and specification of sources of raw material supply.

9. Estimation of material energy, flow balance and input prices.

10. Listing of major equipment by type, size and cost.
11. Listing of auxiliary equipment by type, size and cost.
12. Specification of sources of supply for equipment and process know-how.
13. Specification of site and completion of necessary investigation.
14. Listing of buildings, structures and yard facilities by type size and cost.
15. Specification of supply sources connection costs and other costs for transportation
services, water supply and power
16. Preparation of layout.
17. Specification of skill-wise labour requirements and labour costs.

18. Estimation of working capital requirements

19. Phasing of activities, and expenditure during construction
20. Analysis of profitability
21. Determination of measures of combating environmental problems
22. State the preparedness to implement the project rapidly.

Components of Feasibility Study

A feasibility study is a crucial step in the process of evaluating the viability of a

proposed project or business idea. It helps stakeholders assess the practicality, sustainability, and
potential success of the project before committing significant resources. The components of a
feasibility study typically include:

A) Commercial and Economic Feasibility

The economic feasibility aspect of a project relates to the earning capacity
of the project. Earnings of the project depend on the volume of sales. It taken into
consideration the following important indicators.

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 ✓ Present demand: of the goods produced through the project. i.e., market
facility (or) getting a feel of the market.
✓ Future demand: a projection may be made about the future demand. The
period normally depends upon the scale of investment.
✓ Determining the extent of supply to meet the expected demand and arriving
at the gap
✓ Deciding in what way the project under consideration will have a reasonable
chance to share the market.
✓ Anticipated rate of return on investment. If it is positive the project justifies
the economic norm in the relationship between cost and demand
Future demand can be estimated after failing into consideration the potentialities of
the export market, the changes in the income and prices, the multiple uses of the
product, the probable expansion of industries and the growth of new industries.
The commercial feasibility of a project involves a study of the proposed
arrangements for the purchase of raw materials and sale of finished products etc. This
study comprises the following two aspects.
✓ Arriving at the physical requirement of production input such as raw
materials, power, labour etc., at various level of output and converting them into
cost. In other words, deciding costing pattern.
✓ Matching costs with revenues with a view to estimating the profitability of
the project and the break-even point. The possibility ultimately decides whether
the project will be a feasible proposition.
B) Technical Feasibility
The feasibility report should give a description of the project in terms of
technology to be used, requirement of equipment, labour and other inputs. Location of
the project should be given special attention in relevance to technical feasibility.
Another important feature of technical feasibility relates the types of technology to be
adopted for the project. The exercise of technical feasibility is not done in isolation.
The scheme has also to be viewed from economic considerations; otherwise, it may not
be a practical proportion however sound technically it may be.

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 The promoters of the project can approach the problem of preparation of
technical feasibility studies in the following order
✓ Undertaking a preliminary study of technical requirements to have a quick
evaluation.
✓ If preliminary investigation indicates favourable prospects, working out
further details of the project.
Thus, the technical feasibility analysis is an attempt to study the project
basically from a technician’s angle. The main aspects to be considered under this study
are: technology of the project, size of the plant, location of the project, pollution caused
by the project production capacity of the project, strength of the project.
C) Financial Feasibility
The main objective of this feasibility study is to assess the financial viability
of the project. Here, the main emphasis is in the preparation of financial statement, so
that the project can be evaluated in terms of various measures of commercial
profitability and the magnitude of financing required can be determined. The decision
about the financial feasibility of a project should be arrived at based on the following
consideration:
✓ For existing companies, audited financial statements such as balance sheets,
income statements and cash flow statements.
✓ For projects that involve new companies, statements of total project cost,
initial capital requirements, and cash flow relative to the projective time table.
✓ Financial projections for future time periods, including income statements,
cash flows and balance sheets.
✓ Supporting schedules for financial projections stating assumptions used as to
collection period of sales, inventory levels, payment period of purchases and
expenses and elements of production cost, selling administrative and financial
expenses.
✓ Financial analysis showing return on investment return on equity, break-even
volume and price analysis.
D) Managerial Feasibility

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 The success or failure of a project largely depends upon the ability of the
project manager to manage the project. Project is a bundle of activities and each activity
has its own role. For the success of a project, a project holder has to coordinate all the
activities in such a way that the additive impact of different inputs can produce the
desired result. The ability to manage and organise all such inter related activities come
within the concept of management. If the person in charge of the project has the ability
to manage all such activities, the desired result can be anticipated. There are three ways
to measure the managerial efficiency
✓ Heredity skill
✓ Skill acquired through training.
✓ Skill acquired in course of work
E) Social Feasibility
A project may cross all the above barriers and found suitable but it will lose
its entire creditability, if it has no social acceptance. Though the social customs,
conventions such as caste community, regional influence etc. are creating hindrance
for development of a project should avoid all such social conflicts which will stand on
the successful implementation of the project. Considering the interests of the general
public; projects which offer large employment potential, which channelise the income
from less developed areas will stimulate small industries. In a nut shell, the feasibility
report should highlight on these five testing stones before it can be declared as complete
and only after judging through these indicators a project can be declared as viable and
can be submitted for finance or any other assistance from any institutions.

Appraisal of Projects
The exercise of project appraisal simply means the assessment of a project in terms
of its economic, social and financial viability. This exercise basically aimed at determining the
viability of a project and sometimes also in reshaping the project so as to upgrade its viability i.e.,
it aims at sizing up the quality of projects and their long-term profitability. Appraisal of term loan
proposals (projects) is an important exercise for the financial institutions and investing companies
in credit decisions. The art of project appraisal puts more emphasis on the economic and technical
soundness of the project and it earning potential than on the adequacy and liquidity of the security

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offered. Hence, the process of appraisal should require more dynamic approach as it is linked with
a sense of uncertainty. The appraisal process generally concentrates on the following aspects.
❖ Market and demand Appraisal

Appraisal of commercial viability means assessment of marketability of the end-

product. Therefore, at the time of assessment of commercial viability, the following points require
careful consideration.

➢ Size and prospective growth of the market which the unit is required to cater like nature
of population, their purchasing power, their educational background, fashion etc.

➢ Demand and supply position of the product in the national and international market

➢ Nature of competition

➢ Pricing policy including prospective prices visa-vis the quality of the product

➢ Marketing strategy and selling arrangements made by the unit adequacy of sales force

➢ Export potential

❖ Technical Appraisal

A project is considered to be technically feasible, if it is found to be ‘sound’ from

technical and engineering point of view. It is an attempt to find out how well the technical
requirements of the unit can be met, which location would be most suitable and what the size of
plant and machinery should be. Technical Appraisal covering product mix, capacity, process of
manufacture, engineering knowhow and technical collaboration, raw materials and consumables,
location and site, building, plant and equipment, manpower requirements and breakeven point.

❖ Environmental Appraisal

Environmental appraisal involves the study of impact on land use and micro-
environment, commitment of natural resources, and Government policy.

❖ Financial Appraisal

The basic purpose of financial appraisal is to assess whether the unit will generate
sufficient surplus so as to meet the outside obligations. Financial appraisal usually examines two

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aspects of finance: The cost of the project i.e., the amount required to complete the project and
bring it to normal operation and ways and means of financing the project i.e., the sources from
which the required funds are to be raised. After computing the cost of the project and means of
finance, the various factors required for assessment of financial viability which a banker should
carefully examine are rate of return, specifications, contingencies, cost projection, capacity
utilization, and financing pattern.

❖ Economic Appraisal
Considered as a supportive appraisal it reviews economic rate of return, effective
rate of protection and domestic resource cost.
❖ Managerial Appraisal
This is the most difficult job to evaluate the “MEN” behind the project. It has been
the practical experience of the bank/ financial institutions that even the most technically feasible
and financially/commercially viable project has been a total failure because of lack of management
experience. The problem may become all the more serious if the management is
dishonest/delinquent rather than inefficient and ineffective. Unfortunately, there is no scientific
yardstick by which managerial competence can be judged objectively.
❖ Social Cost Benefit Analysis (SCBA)
Social Cost Benefit Analysis is a methodology for evaluating projects from the
social point of view and focuses on social cost and benefits of a project. There often tend to differ
from the costs incurred in monetary terms and benefits earned in monetary terms by the project.
SCBA may be based on UNIDO method or the LittleMirriles (L-M) approach. Under UNIDO
method the net benefits of the project are considered in terms of economic (efficiency) prices also
referred to as shadow prices. As per the L-M approach the outputs and inputs of a project are
classified into (1) traded goods and services (2) Non traded goods and services; and (3) Labor. All
over the world including India currently the focus is on Economic Rate of Return (ERR) based on
SCBA assume importance in project formulation and investment decisions.
Financial Appraisal of a Project

The basic purpose of financial appraisal is to assess whether the unit will generate sufficient
surplus so as to meet the outside obligations. Financial appraisal usually examines two aspects of
finance: The cost of the project i.e., the amount required to complete the project and bring it to

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normal operation and the means of financing the cost i.e., the sources from which the required
funds are to be raised. Financial evaluation has the objective of ascertaining the financial viability
of the project by close scrutiny of the capital cost, operating cost and revenue projections.
Following are the parameters of the financial evaluation of the project:

• Debt-equity ratio

The equity shareholding in the total capital structure of the company is determined
by the agreed debt equity ratio. While the institutions have the stipulated norms for the debt
equity compositions for different categories of industries, these are not very rigid.

• Promoters’ contribution

The promoter is expected to bring in his share of cost, representative his financial
stake in the project. This is referred to as the promoters’ contribution. The financial institutions
stipulate the quantum of such contributions as a precondition to their project financing.
Industries located in the specified categories of backward areas are eligible for central
investment subsidies which get reckoned as part of equity.

• Debt-service coverage

It is the relation between profit after tax but before depreciation and the principal
and interest on term loans. If the cash flow is 1.5 to 2 times the total amount due as above, the
project is deemed to be sound and viable.

• Repayment schedule
Usually, the institutions allow a moratorium of 2 years from the commencement of
commercial production before the repayment of the loan starts. The loan repayment is
generally expected to be completed in 8 – 10 years of the commencement of the commercial
production
• Syndication

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 Where a group of institutions participate in financing the project, they come to an
understanding on the proportion in which they will be providing funds. IDBI is generally
expected to take a substantial share in such joint financing.
• Conversion
The financial institutions stipulate that they will have a discretion to convert term
loan and/or debentures into equity on agreed terms. However, such conversion will not lead
to equity holding of the institutions being in excess of 40% of the company’s issued capital
and conversion option will be available only after three years of commencement of
production.
• Nominee directors
Nominee directors should be appointed on the boards of all the MRTP companies
assisted by the institutions in respect of the non MRTP companies, the nominee directors are
to be appointed on the selective basis. One or more of the following conditions should be
found to exist for having their nominee directors appointed in such instances
➢ The unit has run into rough weather and is likely to become sick.

➢ The financial institution holds more than 26% of the share capital.

➢ Where the stake of the financial institution by way of loan/ investments exceeds Rs.
crores.
• Operating Costs and Revenue

Projects operating costs and revenues, on an annual basis have to be made for a 10-
year period, which is scrutinised by the project team of the financial institution. The
assumption pertaining to quantities, rates, availability of inputs and services, market demands,
price realisation and expectation of capacity utilisation are all subjected to close review.

• Extent of financing

The amount and modes of financing depend on the nature and size of the project,
the accepted norms in respect of promoter’s contribution, debt-equity ratio, debt service
coverage, etc. besides factors such as the resources of the financial institution and requirement
in respect of listing of securities in the Stock Exchanges

• Returns

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 Financial institution use the different techniques of financial evaluation including
pay-back period, internal rate of return, return on investment etc. depending on the nature of
projects being reviewed. It is expected that the project will have a debt service ratio ranging
from 1.5 to 2 and will be able to pay a dividend on equity of not less than 10 % within three
years of commencement of production.

• Risks

Careful assessment of the risk is associated with the project is a prime necessity associated
may be industry-specific, particular project, its product, the concerned market conditions, the
company’s capital structure and the nature securities offered by it. Eventually financial
evaluation of project has 4 important aspects

➢ The appropriateness of the capital cost estimate;

➢ The reliability of the estimates of the operating costs, revenues and surpluses;

➢ The adequacy of return on investment to service equity and debt; and

➢ The matching of financing pattern to the project’s requirements.

Project Evaluation Techniques

It is the final stage of project management. The process of measuring the progress
made and assessment of the results of a project is known as project evaluation.

Meaning of Project Evaluation

It is derived from the Latin word ‘Valuere’. It means determination of value of an

activity or a thing. It is the process of appraising the progress and performance in relation to
the project’s initial or revised plan. It also appraises the project against its goals and objectives.
It measures how far the objectives have been achieved so far.

Importance of Project Evaluation

Project Evaluation helps the organization improve its projects management skills
on future projects. It helps to know whether the project is moving according to plan or not. It

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brings into light the project’s strengths and weaknesses. It gives the management a good idea
of how the project is progressing. Thus, project evaluation measures the success of a project.

Methods of Project Evaluation

The most important and popular of these can be classified into two broad categories
as follows:

I. Non-Discounting Techniques or Traditional Methods

It does not take into consideration the time value of money. Important traditional methods
may be discussed as follows:

Urgency Method
Urgency or degree of necessity plays an important role and project that
cannot be postponed is undertaken first.

Merits

✓ It is a very simple technique.

✓ It is useful in case of short-term projects requiring lesser investment.

Demerits

✓ Selection is not made on the basis of economical consideration but just on the
basis of situation.

✓ It is not based on scientific analysis.

Pay Back Method

It is cash-based technique. It is a period over which the investment would
be paid back. It is a breakeven point of the project, where the accumulated returns
equal investment. It is also called ‘pay-out’ or ‘payoff’ period or ‘recoupment’ or
‘replacement period’.

1. When Annual Cash Inflows are Equal: - when cash inflows/ benefits are equal pay back
period is calculated as follows: -

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2. When Annual Cash Inflows are Unequal: when cash inflows/ benefits are not equal pay
back period is calculated in the form of cumulative cash inflows as follows: -

Advantages of Pay Back Method

✓ It is simple to understand and easy to apply.

✓ It is very important for cash forecasting, budgeting and cash flow analysis.
✓ It minimizes the possibility of losses through obsolescence.
✓ It takes into account liquidity.
✓ It is easier for projects yielding returns in initial years

Disadvantages of pay back method

✓ It ignores the time value of money.

✓ It completely ignores cash inflows after the payback period.
✓ It insists only on recovery of the cost of the project.

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✓ It does not measure the rate of return.

Post Pay Back Method

The post pay back method has been evolved to overcome the limitations of
pay back method. Under this method, the entire cash inflows generated from a project
during its working life are taken into account.
It is calculated as under:
Post Pay Back Profitability = Total Cash Inflows in Life - Initial Cost
Or
Annual Cash Inflows × (Total Life – Pay Back Period)
Average Rate of Return Method (ARR)
It represents the ratio of the average annual profits to the average investment
in the project. It is based on profits and not cash flows. This is also known as
Accounting Rate of Return Method or Return on Investment Method or Unadjusted
Rate of Return Method. ARR is found out by dividing average income by the average
investment. It is calculated with the help of the following formula:

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 The higher the ARR, the better is the project. If the calculated ARR is equal to or more
than the company’s target rate of return, the project will be accepted. If the calculated ARR is
less than the company’s target rate of return, the project will be rejected.

Advantage of ARR

✓ It is simple to understand and easy to apply.

✓ It takes into consideration earnings over the entire life of the project.
✓ It considers profitability of the investment.
✓ Projects of different character can be compared.
✓ Rate of return may be readily calculated with the help of accounting data.

Disadvantages of ARR

✓ This method does not give any importance to the time value of money.
✓ It does not differentiate between the size of the investment required for each project
✓ It is based upon accounting profits, instead of cash flow.
✓ It considers only the rate of return and not the life of the project.
✓ It ignores the fact that profit can be reinvested.

II. Discounting Techniques or Modern Methods

It takes into consideration the time value of money. Important modern
methods may be discussed as follows:
Discounted Pay Back Period
A major short coming of the payback period method is that it does not take
into account the time value of money. To overcome this limitation, the discounted pay
back method is suggested. In this method, cash flows are first converted into their
present values (by applying suitable discounting factors) and then added to ascertain
the period of time required to recover the initial outlay on the project.
Net Present Value Method (NPV)
NPV method involves discounting future cash flows to present values. The
cash outflow (i.e., initial investment whose present value is the same) is deducted from
the sum of the present values of future cash inflows (returns or benefits). The balance

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amount is NPV which may be either positive or negative. If the NPV is positive, it
means that the actual rate of return is more than the discount rate and it contributes to
the wealth of the shareholders. A negative NPV indicates that the project is not even
covering the cost of capital. It means that the actual rate of return is less than the
discount rate.

Advantages of NPV
✓ It takes into account the time value of money.
✓ It focuses attention on the objective of maximization of the wealth of the project.
✓ It considers the cash flow stream over the entire life of the project.
✓ This method is most suitable when cash inflows are not uniform.
✓ This method is generally preferred by economists

Disadvantages of NPV
✓ It involves complicated calculations.
✓ It is difficult to select the discount rate.
✓ This method is not suitable in case of projects involving different amounts of
investment.
✓ Not suitable in case of two projects having different useful lives.

Benefit Cost Ratio (Profitability Index Method)

Two projects having different investment outlay cannot be compared by
Net Present Value method because it indicates the NPV in absolute terms. In such a
situation Benefit Cost Ratio should be applied. It is the ratio of benefits (cash inflows)
to (cash outflows). It is the ratio present value of cash inflows to present value of cash
outflows. Thus, it measures present value of returns. This method is also known as
Profitability Index or Present Value Index Method.

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“Accept the project if it’s PI (Profitability Index) is more than one and reject the project if
its PI is less than one. Higher the Profitability Index better is the project.
Advantages of Benefit Cost Ratio / Profitability Index
✓ It is very scientific and logical
✓ It is based upon the real profitability of projects.
✓ It is very useful to compare the projects having different investments.
✓ It reflects time value of money.
✓ It considers all cash flows during the life of the project.
Disadvantages of Benefit Cost Ratio / Profitability Index
✓ It is comparatively difficult to understand and follow
✓ This method is not in accordance with accounting principals
✓ It cannot be used for comparing those projects having unequal lives.
✓ It is difficult to estimate effective life of a project.

Internal Rate of Return (IRR)

IRR was first introduced by Joel Dean. In IRR, we try discounting at
different discount rates until we reach the rate at which the present value of cash
inflows to present value of cash outflows (investment). Thus, internal rate of return is
the rate at which total present value of future cash flows is equal to initial investment.
In other words, it is the rate at which NPV is zero. This rate is called the internal rate

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because it exclusively depends on the initial outlay and cash proceeds associated with
the project and not by any other rate outside the investment.
Calculation of IRR
NPV indicates the present value of the cash flows of a project at a particular
discount rate. IRR attempts to ascertain the interest rate at which the present value of
cash inflow is made equal to the initial investment is a time adjusted rate of return
which equates present value of cash flows with original cash outflow can be calculated
through the following steps.
1. Obtain the annuity table factor using formula F = Investment of the project/Annual
cash inflow 1.Locate the factor in the annuity table, corresponding to the number of
years of the project, to obtain the discount percentage intervals.
2. Ascertain the exact discount percentage using interpolation

If the IRR is greater than the desired minimum rate of return, the project is accepted
and if it is less than the desired minimum rate of return, then the project is rejected.

Advantages of IRR
✓ This method considers all the cash flows over the entire life of the project.
✓ Cost of capital need not be calculated.
✓ IRR gives a true picture of the profitability of the project even in the absence
of cost of capital.
✓ Projects having different degrees of risk can easily be compared. 5. It takes
into account the time value of money.
Disadvantages of IRR
✓ It is difficult to understand and use in practice because it involves tedious
and complicated calculation.

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✓ Sometimes it may yield negative rate or multiple rates which is rather
confusing.
✓ It is applicable mainly in large projects.
✓ It yields results inconsistent with the NPV method if projects differ in their
expected life span, investment timing of cash flows.

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