Chapter 2: Aspects of project preparation & analysis

Objectives
At the end of this chapter: students will able to :
 State and explain Aspects of project preparation & analysis

Wednesday, June 5, 2024 1

 Aspects of Project Preparation and Analysis

 The project analyst must consider several aspects when carrying

project analysis.
 The major aspects of project preparation and analysis are :
 Technical Aspects
 Commercial /Demand and Market/ Aspects
 Institutional-Organizational-Managerial Aspects
 Financial Aspects
 Economic Aspects
 Social Aspects
 Environmental aspect analysis
Wednesday, June 5, 2024
2
 1:Technical Aspects
 The technical aspect of the project considers:

 the technical feasibility of the project.

 The technical analysis is concerned with:

 The project's physical inputs & outputs of real goods & services &

 Examine the technical relations in a project (technology of

production & processing).

 Experts (engineers, soil scientists, agronomists, etc...) need to

provide information that lead to:

 the identification of supplies, production, productivity, and

technical input/output relation.
3
 In general the technical analysis is primarily concerned with:

 Material inputs

 Manufacturing process and technology

 Product mix

 Plant capacity

 Work schedule
 Location and site
 Machines and equipment
 Project charts and layouts

4
 2: Commercial aspects
• The commercial aspects of a project involves:

 the arrangements for marketing the output produced by project &

ensuring supply of inputs needed to build & operate the project.

• The analyst needs to assess:

 the effective demand of the project output &

 the prices that may prevail under the demand & supply situations.

• The market should be assessed:

 for its capacity to absorb the excess production.

 To evaluate impact of product supply on price of the product.

 To evaluate viability of project under changed of the price.

 The analyst also needs to know whether :

o The appropriate arrangements are there for :

• the supply of inputs (fertilizers, pesticides & improved seeds) &

o As the appropriate marketing channels are exists :

• Do they have capacity to supply inputs on times.

• If not:- new channels should be established to obtain inputs.

 3:Institutional Aspect
• The institutional aspect of a project concerned with:

 the framework within which the project will have to operate.

• A understanding of the institutional aspect helps to:

 identify the components of institutional framework that will affect

the project.

• Some elements that constitute the institutional framework include:

 Government institutions, project authority, land tenure, financial

institutions, religious institution, practices and social customs.

• There is a need to understand:

 the administrative system of the region where the project has to

be undertaken.
 4: Management Aspect

 The main task of management is :

 to implement the project objectives within the framework of

organizational structure.

 The analyst need to assess :-as the project be provided with the
competent personal to manage it.

 For good management:

 a clear definition of functions and activities are required.

 allocating responsibilities to various agencies for various project

activities are required.

 suitable mechanism for coordination of the activities of participating

 5: Organizational Aspect.

 Organization refers to :

o the overall design & structure of the body of entity that would
undertake the task of project execution.

 The proposed organization must have to:

o the capacity to carry out the assignments given to it &

o Agreed with the institutional & legal framework of the country.

 The analyst have to asses as the organization set-up of the project as
it is adequate by examining:

 As lines of authority running from top to bottom of the organization

and the chain of command is clear.

 As the responsibilities of each authority is clearly defined

 As decision making placed near the scene of action as the number

of the levels of authority is minimum.

 The institutions, organizational structure, inter- organizational

linkages & efficient management of the organizations are crucial for
success of the project.
 6: Financial Aspects

 Financial analysis seeks to ascertain:

o whether the proposed project will be financially viable in the

sense of being:

 able to meet the burden of servicing debt and

 satisfy the return expectations of those who provide the

equity capital.

 Here the project analyst is concerned with:

o the financial effects of the proposed project on each of its

various participants (firms, farmers, government etc.).
Wednesday, June 5, 2024
11
 By examining the financial implications of the project for these
parties, the analysts can identify the projects:

 financial efficiency,

 incentive impact to the participants in the project,

 creditworthiness & liquidity (say, could the firm have enough

working capital?).

 The financial analysis demonstrates:

 the magnitude of costs of investment,

 production and overheads and

 magnitude of benefits.
Wednesday, June 5, 2024
12
 This analysis is basis for evaluating the project profitability.

 Project profitability depends on:

o a comparison of costs versus revenues using realistic

market prices of materials, labor and outputs.

• The aspects, which have to be looked into while conducting

financial appraisal, are:
1. Costs of the project
2. Means of financing: equity, credit terms, etc
3. Cost of capital

Wednesday, June 5, 2024

13
 4. Projected profitability
5. Break-even point
6. Cash flows of the project
7. Projected financial position
8. Level of financial risk

Wednesday, June 5, 2024

14
 7: Economic Aspects

 The economic aspects of project preparation & analysis require a

determination of:
 the likelihood that a proposed project will contribute significantly
to the development of the total economy (society as a whole) &
 that its contribution will be great enough to justify using the
scarce resources it will need.
 In such evaluation the focus is on:
 the social costs and benefits of a project, which may often be d/t
from its monetary or financial costs and benefits.

 In financial analysis:- project is viewed from the participants (or

owners) point of view, while the economic analysis :-it is viewed
form the society’s point of view.
 Decision makers here are concerned about:

o the investment that will best further national objectives.

 This is true whether the resources committed are being invested by

government or by individuals within the economy.

 Financial analysis uses market prices to value inputs & outputs.

 While economic analysis uses ‘economic prices’ or ‘shadow prices’

to better approximate the opportunity costs of an input:-

o the amount the economy must give up if the resource is transferred

from its present use to the project.

16 Wednesday, June 5, 2024

 Similarly, to value project’s output economic analysis uses:

 the marginal value of a given output to approximate the real value

o the value that consumers place on that commodity.

 Thus economic analysis requires adjustment of market prices:

 which may not reflect the real value of resources & outputs into
economic prices.

 It also requires determination of economic prices of those goods that

might not have market prices but that involved in project as a real
resources.

Wednesday, June 5, 2024 17

 8: Social Aspect.
 It is very important to assess the social patterns, customs, culture,
traditions and habits of the clientele.

 The broader social implications like :

 Changes in living standards, welfare, consumption habits, income

distribution effects, etc., of proposed investments have to be examined.

 In selecting some projects, weights are assigned for income distribution so that:

 the projects which benefit the lower income groups will be favored.

 The adverse effect of project on particular group & environmental

impact are also have to be examined.
 9: Environmental aspect analysis

 In recent years environmental concerns have assumed a great deal of

significance.

 For projects financed by foreign donors, an environmental impact

assessment is a prerequisite for project financing.

 Environmental impact of a project refers to :

 the effect of a project on animals, plants, water, air & human beings
existing in the project area.

 Ecological analysis should be done for projects which have

significant ecological effects like :

 Power plants & irrigation schemes & environmental polluting

19 industries. Wednesday, June 5, 2024
 Such projects environmental impact assessment is important b/c:

 Economic benefits that may generated from project can be counter-

balanced by undesirable environmental effects of the project.

 The key questions raised in ecological analysis are:

I. What is the likely damage caused by the project to the environment?

II. What is the cost of restoration measures required to ensure that the
damage to the environment is contained within acceptable limits?

20 Wednesday, June 5, 2024

 Thank
you!
Wednesday, June 5, 2024 21