Introductory Discussion on Projects: Project Selection and Feasibility Study

Shish Haider Chowdhury Finance Controller (Army), Log Area Dhaka Cantonment BPI, 03 February 2012 http://www.youtube.com/watch?v=oTyWeW5MEio

What is project?
Project is a set of interrelated activities implemented through a unified management to achieve some specific purposes within a timeframe through mobilization of clearly defined resources (human, Physical and financial).

Project Cycle

Selection Criteria for Foreign Fund Projects

Respond to community needs and involve community participation; Foster self-reliance by encouraging locally-managed and financed initiatives Address social, economic and sustainable development activities; Maximize the use of local resources; Demonstrate sustainability; Involve women, youth and children as active participants and beneficiaries Promote environmental protection and sustainability

Project Approval Process (Private Sector)

Project Approval Process (GOB)

Strategic Planning and Project Selection

Strategic planning involves determining long-term objectives, predicting future trends, and projecting the need for new products and services. Organizations often perform a SWOT analysis:
Strengths, Weaknesses, Opportunities and Threats

As part of strategic planning, organizations should:

Identify potential projects. Use realistic methods to select projects to work on. Formalize project initiation by issuing a project charter.

Information Technology Planning Process

Methods for Selecting Projects

There is usually not enough time or resources to implement all projects. Methods for selecting projects include:
Focusing on broad organizational needs; Categorizing projects based on nature and size; Performing net present value or other financial analyses; Using a weighted scoring model.

Focusing on Broad Organizational Needs

It is better to measure gold roughly than to count pennies precisely. Three important success criteria for projects:
There is a need for the project. There are funds available for the project. There is a strong will to make the project succeed.

Categorizing Projects
One categorization assesses whether the project provides a response to:
A problem An opportunity A directive

Another categorization is based on the time it will take to complete a project or the date by which it must be done. Another categorization is the overall priority of the project.

Financial Analysis of Projects

Financial considerations are often an important aspect of the project selection process.
Three primary methods for determining the projected financial value of projects:

Net present value (NPV) analysis Return on investment (ROI) Payback Period (PBP) analysis

Net Present Value Analysis

Net present value (NPV) analysis is a method of
calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Projects with a positive NPV should be considered if financial value is a key criterion. The higher the NPV, the better.

Net Present Value Example

Note that totals are equal, but NPVs are not because of the time value of money.

Return on Investment
Return on investment (ROI) is calculated by subtracting the project costs from the benefits and then dividing by the costs. ROI = (total discounted benefits - total discounted costs) / discounted costs The higher the ROI, the better. Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects. Internal rate of return (IRR) can by calculated by setting the NPV to zero.

Payback Period (PBP) Analysis

The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the total amount invested in a project.
Payback occurs when the cumulative discounted benefits and costs are greater than zero. Many organizations want projects to have a fairly short payback period.

Charting the Payback Period

Excel file

Weighted Scoring Model

A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria. Steps in identifying a weighted scoring model: 1. Identify criteria important to the project selection process. 2. Assign weights (percentages) to each criterion so they add up to 100 percent. 3. Assign scores to each criterion for each project. 4. Multiply the scores by the weights to get the total weighted scores.

The higher the weighted score, the better.

Sample Weighted Scoring Model for Project Selection

Problems in Project Portfolios

No link between strategy and project selection; Poor-quality portfolios (e.g. projects); Reluctance to execute projects; Scare resources, a lack of focus; Selecting short-term and easy projects; Information overflow (or lack of quality of information); Decision making basing on power.

Project Selection Stages

Stage 1: Strategic Considerations Phase
Considering both external and internal business environments Matching with business strategies

Stage 2: Project Evaluation Phase

Economic returns Risk analysis Other criteria

Stage 3: Project/Portfolio Selection Phase

Scoring method

Project Selection Decision Process

Step1: Proposal Submission
Ensure the completeness of proposal

Step 2: Assignment of external reviewers (division managers)

Assign each proposal to one or more peer reviewers

Step 3: Peer review (external reviewers/division managers)

Division managers coordinate the process as coordinators Validate the peer review results

Step 4: Aggregation of review results (division managers)

Recommend proposal list for panel evaluation

Step 5: Panel evaluation (department/division managers & experts)

Suggest a funded list

Step 6: Final decision (top management division managers)

Key Success Factors for Project Selection

Centralised view: have and inventory of current and
proposed significant projects

Financial analysis: ROI, NPV, Payback, Risk analysis: complexity, technology risk, cash flow,
organizational changes

Interdependencies among projects Overall analysis: focus on overall portfolio performance Accountability and governance: top management
involvement, business leaders accountable, using regular project portfolio reporting

Challenge of Project Selection

Lack of knowledge to evaluate risks Lack of commitment of project authority Lack of cross-functional communication Lack of a clear strategy Lack of appropriate way to measure project benefits Lack of knowledge of portfolio management techniques

Project Feasibility Study

Project Feasibility Study

A Project Feasibility Study is an exercise that involves documenting each of the potential solutions to a particular business problem or opportunity. Feasibility Studies can be undertaken by any type of business, project or team and they are a critical part of the Project Life Cycle.

Factors to be considered
A brief description of the business to assess more possible factor(s) which could affect the study The part of the business being examined The human and economic factor The possible solutions to the problems

Feasibility study is valuable

A feasibility study is valuable for: Starting a new business Expansion of an existing business Adding an enterprise to an existing business Purchasing an existing business

Feasible business willA feasible business will:

Generate adequate cash flow and profits, Withstand risks, Remain viable in the long-term Meet the goals of the founders

Feasibility Study helps

The feasibility study helps to frame and flesh-out specific business scenarios so they can be studied in-depth.

Pre-feasibility study helps

May help sort our alternatives and determine if a full-blown feasibility study is warranted.

Market Assessment
A market assessment may be conducted first to identify market opportunities. If no opportunities exist, there may be no reason to proceed further.

Study Results
Outline in depth the various business scenarios examined and the implications, strengths and weaknesses of each.

Go/No Go Decision
The feasibility study will be a major information source in making this critical decision.

Reasons Not to do a Study

We already know it is feasible. We did a study a couple of years ago. Just a way for consultants to make money. The company selling us the equipment says it is feasible. Lets hire a general manager and have him do the study. Waste of time we need to buy the site and begin construction.

Reasons to Do a Study
Gives focus to the project. Narrows the business alternatives. Identifies new opportunities. Identifies reasons not to proceed. Provides valuable information for go/no go decision. Increases probability of business success by identifying weaknesses early.

Reasons to Do a Study
Provides documentation that the idea was thoroughly investigated. Helps attract funding from lenders, grant providers, etc. Helps attract equity investment

Not the Business Plan

Feasibility study conducted before decision to proceed (go/no go). Business plan prepared after decision to proceed (go/no go). Feasibility study provides investigative function. Business plan provides planning function.

Feasibility Study Outline

1) Description of the Process: Identification and exploration of business scenarios. Define the project and alternative scenarios. Relationship to the surrounding geographical area.

Feasibility Study Outline

2) Market Feasibility Industry description. Industry competitiveness. Market potential Access to market outlets. Sales projection

Feasibility Study Outline

3) Technical Feasibility Determine facility needs. Suitability of production technology. Availability and suitable of site. Raw materials. Other inputs.

Feasibility Study Outline

4) Financial/Economic Feasibility

Estimate the total capital requirements. Estimate equity and credit needs. Budget expected costs and returns.

Feasibility Study Outline

5) Organizational/Managerial Feasibility Business Structure Business Founders

Feasibility Study Outline

Study Results Identify and describe various business scenarios. Compare and contrast scenarios. Outline criteria for decision making.

Energy Planning in Bangladesh

Vision and Mission

Vision To provide access to affordable and reliable electricity to all by the year 2020. Mission Statement Ensure uninterrupted and quality power supply for all by 2020 through improvement in generation, transmission and distribution systems.

Bangladesh Energy Profile 2012

Natural gas and coal are the primary mineral resources produced in Bangladesh. Natural gas and petroleum are found in the northeast of the nation, and in the coastal waters. Limestone is also produced. To reduce the current gas and power deficit, Bangladesh plans to build several infrastructures: a 500 MW transmission line with India by 2012, 2 nuclear reactors by 2017 and a LNG regasification unit by 2012 with a capacity of 3.5 Mt /year.

In FY 2010-11 total generation capacity was 6,727 MW (upto June 15, 2011) including 3,534 MW in Public sector and 3193 MW in Private sector (including REB).

Power Generation Capacity

In the FY 2010-11 maximum generation was 4,890 MW (June 13, 2011).

Reform Objectives
Bringing the entire country under electricity service by the year 2020 in phases; Making the power sector financially viable and able to facilitate economic growth; Increasing the sectors efficiency; Introducing new corporate culture in the power sector entities ; Improving the reliability and quality of electricity supply; Using natural gas as the primary fuel for electricity generation; Increasing private sector participation to mobilize finance; Ensuring reasonable and affordable price for electricity by pursuing least cost options; Promoting competition among various entities.

Calendar Year Wise Projects Completion (From 2010 to 2015)

Energy Efficiency Initiative

Steps to revise Building Code inserting Energy Efficiency and Solar Energy issue To build awareness amongst the children, steps t to incorporate Energy Efficiency and Solar Energy issue in the of School/Madrasa/Colleges; Installation of Solar Panel in the Govt., Semi Govt and autonomous organizations within next 3 years; Use of CFL bulb in all Ministries and power sector entities; Conventional street lights will be replaced by LED and solar; Public awareness for energy conservation; Discontinuation of incandescent bulb and electric heater gradually; Limited use of Air Conditioners keeping temp within 25%C; Encouraging the business community for using solar energy; Introduction of Energy Star Rating system in the electric appliances (BSTI); Discouraging use of neon sign in the markets/ shopping malls at night; Closing of markets and shopping malls within 8 p.m.; Steps to introduce Pre-paid metering system all over the country.

Renewable Energy (Goals)

To increase access to electricity among the people living in off grid, isolated and in accessible remote areas by solar home systems (SHS); Improve the standard of living and increase income by introducing solar power and wind power; To increase the supply of power by installing offshore wind turbines; Explore the potential of other forms of renewable energy such as micro hydro, tidal energy, bio-mass and bio-diesel to meet the power and energy demand of the rural people; and To explore the potential of municipal wastes to generate electricity.

Thank You Very Much