CHAPTER- 1

Introduction

Project Management is the application of knowledge, skills, tools and techniques to project activities in order to meet stakeholders’ needs and expectations. Project management involves balancing competing demands such as

• Scope, time, cost , quality
• Stakeholders with differing needs and expectations
• Identified requirements (needs) and unidentified requirements (expectations).

The key factor in a successful project management is coordination in various aspects of management such as HR, MIS, Finance, Production etc.

HR: (Human Resources):

• From the view point of organization HR represent the people at work. They are the sum total of inherent abilities, acquired knowledge and skills, talents and aptitudes of its employees.
• HR is the most important element of organization. Efficient utilization of all other resources depends on the quality of HR.
• HR includes all dynamic components of all people at all level in organization and they have greatest potential to develop and grow provided the right climate is provided to them. Generation of new projects and managing and evaluating existing projects need decision making abilities of employees.
• HR thus plays an important role in Project management.

MIS (Management Information System):

• Management comprises the processes that describe what managers do in the operation of their organization like Planning, organization, control and making decisions. Decision making is a fundamental pre requisite to each of the fore going process including Project management.
• Information is data that have been retrieved and used for informative purpose and decision making. For e.g. Sales forecast, Profit and Loss a/c are information required for financial analysis; market survey helps in market analysis in a Feasibility study of a project.
• Systems are a set of elements joined together for a common objective. An organization is a system and the various divisions, departments and units are the subsystem. To evaluate and for efficient management of projects an effective system is required.
• The objective of an MIS is to provide information for decision making on planning, organizing and controlling the operations of subsystems of the firm and to provide a synergistic organization in the process.
• MIS support decision making at all levels of organization. MIS are made of people, computers, procedures, databases and so on. Thus the impact of MIS becomes important in facilitating decisions necessary for project management.

Finance:

• Finance function deals with the problem of raising funds and their effective utilization in business.
• Various decisions regarding acquisition of assets, specific norms where money is to be invested is the scope of finance.
• It is the ways and means of managing money and involves activity concerned with planning and controlling of firms financial resources.
• Finance plays an important role while evaluating a new project and to generate finance for the project.
• It helps to decide on which type of finance is to be chosen and what kind of working capital levels are to be maintained in the project.
• Thus finance has an impact on decision making in evaluating a project.

Production:

• Production is a process of converting raw materials to finished goods. Production plays an important role in project management.
• The choice of technology required for the project is to be decided depending on the plant capacity and the appropriateness of technology.
• It involves ensuring the availability of raw materials and other utilities.
• The important charts and lay outs drawings like Material flow diagram, production line diagram etc facilitates in Project management.
• Production helps in evaluating a project such that it meets the expectations of the stakeholders.

Generation and screening of project ideas

The business has to identify the investment opportunity which is feasible and promising. Identification of promising investment opportunities requires imagination, sensitivity to environmental changes and a realistic assessment of what the firm can do. The broad considerations and guidelines helpful in the generation and screening of project ideas are given below:

• Generation of ideas
• Monitoring the environment
• Corporate appraisal
• Profit potential of industries: Porter Model
• Scouting for project ideas
• Preliminary screening
• Project rating index

Generation of project ideas:

Stimulating the flow of ideas: to stimulate the flow of investment ideas, the following are helpful:

1. SWOT analysis: (Strength, Weakness, Opportunities and threats): It represents a conscious, deliberate and systematic effort by an organization to identify opportunities that can be profitably exploited by it. Periodic SWOT analysis facilitates the generation of ideas.
2. Clear articulation of objectives: The operational objectives of a firm may be one or more of the following:
• Cost reduction
• Productivity improvement
• Increase in capacity utilization
• Improvement in contribution margin
• Expansion into promising fields.
3. Fostering a Conducive climate: To tap the creativity of people and to harness their entrepreneurial urges a favourable organizational climate has to be encouraged.

Monitoring the environment:

The firm must systematically monitor the environment and assess its competitive abilities. For purposes of monitoring, the business environment may be divided into six broad sectors.

• Economic Sector (State of the economy, Overall rate of growth, Growth rate of primary, secondary, and tertiary sectors, Cyclical fluctuations etc.)
• Governmental Sector (Industrial policy, Government programmes and projects, Tax framework,. Subsidies, incentives, Import and export policies etc.)
• Technological Sector (Emergence of new technologies, Access to technical know-how, foreign as well as indigenous etc.)
• Socio-demographic Sector(Population trends, Age shifts in population, Income distribution, Educational profile, Attitudes toward consumption and investment)
• Competition Sector (. Number of firms in the industry and the market share of the top few (four or five), Entry barrier, Marketing policies and practices etc.)
• Supplier Sector (Availability and cost of raw materials, Availability and cost of energy, Availability and cost of money etc.)

Corporate appraisal

A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment opportunities which can be profitably exploited. The broad areas of corporate appraisal and the important aspects to be considered under them are as follows:

• Marketing and Distribution (Market image, market share, customer loyalty etc.)
• Production and operations ( Condition and capacity of plant, cost structure)
• Research and development (Research capability, co ordination between research and operations, etc)
• Corporate resources and personnel (corporate image, state of industrial relation etc.)
• Finance and accounting ( Cost of capital, relation with shareholders, accounting and control system)

Profit potential of industries:

There are several useful tools or frameworks that are helpful in identifying promising investment opportunities. The more popular ones are the Porter model, life cycle approach, and experience curve.

Porter Model: Profit Potential of Industries: Michael Porter has argued that the profit potential of an industry depends on the combined strength of the following five basic competitive forces:

• Threat of new entrants
• Rivalry among existing firms
• Pressure from substitute products
• Bargaining power of buyers
• Bargaining power of sellers

Life Cycle Approach: Many industrial economists believe that most products evolve through a life cycle which has four stages:

• pioneering stage,
• rapid growth stage,
• maturity and stabilization stage,
• and decline stage.

Each stage presents investment opportunities that exhibit different characteristics. Investment in the pioneering stage, per se, may have a low return and negative NPV. However, it may possibly create options for participating in the growth stage. Investment in the growth stage is likely to earn a high return and generate positive NPV. Investment in the maturity stage may earn average return and be NPV-neutral. Finally, investment in the decline stage may earn meager returns and produce negative NPV.

The Experience Curve

Investments aimed at reducing costs are essential to the long-term survival and profitability of the firm. The experience curve is a useful tool for planning such investments.

The experience curve shows how the cost per unit behaves with respect to the accumulated volume of production. The accumulated volume of production is the total number of units produced cumulatively from the very beginning-it should not be confused with the annual rate of production.

Scouting for project ideas

A wide variety of sources should be tapped to identify good project ideas. They are:

• Analyze the Performance of Existing Industries.
• Examine the Inputs and Outputs of Various Industries
• Review Imports and Exports
• Study new technological developments
• Explore the possibility of reviving sick units.

Screening of project ideas: Some kind of preliminary screening is required to eliminate ideas which prima facie are not promising. For this purpose the following aspects may be looked into:

• Compatibility with the promoter.
• Consistency with governmental priorities
• Availability of inputs
• Adequacy of market
• Reasonableness of cost
• Acceptability of risk level

Compatibility with the promoter: The idea must be compatible with the interest personality and resources of the entrepreneur. It must offer him rapid growth and high return on the invested capital.

Consistency with governmental priorities: The project idea must be feasible given the national goals and governmental framework.

Availability of inputs: The resources and inputs required for the project must be reasonably assured. Capital requirements, technical know how, raw materials, power supply etc is within the manageable limits.

Adequacy of market: The size of the present market must offer the prospect of adequate sales volume. There should be potential for growth and a reasonable return on investment.

Reasonableness of cost: the cost structure of the project must enable it to realize an acceptable profit with a price.

Acceptability of risk level: The desirability of a project is critically dependent on the risk characterizing it. The risk factors can be technological changes, competition from substitutes, competition from imports, governmental control over price and distribution.

Project rating index:

When a firm evaluates a large number of project ideas regularly, it may be helpful to streamline the process if preliminary screening. For this purpose a preliminary evaluation may be translated into a project rating index. The steps involved in determining the project rating index are as follows:

• Identify factors relevant for project rating.
• Assign weights to these factors (the weights are supposed to reflect their relative importance).
• Rate the project proposal on various factors, using a suitable rating scale. (Typically a 5-point scale or a 7-point scale is used for this purpose.)
• For each factor, multiply the factor rating with the factor weight to get the factor score.
• Add all the factor scores to get the overall project rating index.

CHAPTER 2

Feasibility study of Project

A Feasibility study of project is done with a goal to identify the existing strengths and weakness of the project. A Feasibility study of project includes market analysis, technical analysis financial analysis, economic and ecological analysis

Market Analysis: The first step is to estimate the potential size of the market for the product proposed in the project and get an idea of market share that is likely to be captured. Market and demand analysis are concerned with 2 broad issues:

• What is the likely aggregate demand for the product/service?
• What share of the market can be captured?

Step (1) Situational analysis and specification of objectives:

Process stands with informal discussion with customers, competitors, middlemen and others in the industry.

Analysis of situation generates sufficient idea to measure the market and gives reliable information.

The objectives should be defined clearly and comprehensively.

Questions not relevant to the market and demand analysis should not be asked.

Step (2): Collection of secondary information:

Secondary information is the information that has been gathered in some other context and is already available provides a base point for market and demand analysis.

Sources of secondary information are:

National sample survey reports

Peoples of planning commission

Economic survey of industries

Industry potential surveys

Annual survey of industries

Reports of CBO

Reports of Muscat securities exchange.

Reports from chamber of commerce and industries.

Evaluation of secondary information:

While this information is available readily , its reliability, accuracy and relevance for the purpose under consideration must be carefully examined.

Who gathered the information?

What was the objective?

When the information was collected?

How representative was period for which the information was gathered?

Are the terms was selected?

What was the sample size?

How representative was the sample?

How satisfactory was the process of information gathering?

What was the degree of misrepresentation by respondents?

How accurate the information analyzed?

Step (3): Conduct of market survey:

The secondary information must be supplemented with primary information gathered through market survey specified to the project surveyed. Primary information represents information that is collected for the first time to meet the specified purpose on hand.

The objectives of the market survey should be to sought the information of any one or all of the following:

Demand and rate of growth of demand

Demand in different segments of market

Income and price elasticity of demands

Motives for buying

Satisfaction with existing products

Attitudes towards various products

Socio-economic characteristics of buyers.

Steps in a sample survey are:

Define the target population

Select the sampling scheme and sample size.

Develop the questionnaire

Recruit and train field workers.

Collection information from the sample of respondents.

Scrutinizing the information

Analysis the information and

Interpreting the results.

Problems:

Heterogeneity of the country

Multiplicity of language

Design of questionnaire.

Step (4): Characterization of the market:

Based on the secondary sources and market survey the market for the product may be described in terms of:

Breakdown of demand:

Nature of product: One generic name often subsumes many different products:

(e.g Commercial vehicles cover trucks, and buses of various capacities.)

Consumer groups

Consumers may be divided into ® industrial

These may be further subdivided into : income groups, age groups etc.

Geographical division:

A geographical breakdown of consumers is helpful for products which have small value to weight relation and for products which require regular after sale service.

Price: It may be helpful to distinguish different types of prices like

• manufacturers price as FOB price or CIF price
• Landed price for imported goods
• Average wholesale price
• Average retail price

Methods of distribution and sales promotion:

• Different distribution channels depending on nature of products
• Sales promotion (advertising, discounts etc.)

Consumers: Consumers may be characterized based on

• Demographic® age, sex, income, profession, social backgrounds.
• Attitudes ® preferences, habits, attitudes, responses.

Supply and competition:

• It is necessary to know existing source of supply whether foreign or domestic.
• Competition from substitutes and near substitutes should be specified.

Government policy: The government plans, policies have a bearing on the market for a product.

Step (5) : Demand Forecasting:

After gathering information about various aspects of the market from primary and secondary sources an attempt may be made to estimate future demand. Demand Forecasting means estimating or predicting the future demand 0r future sales for the product of a firm.

The various methods of demand forecasting are:

1. Qualitative method: Relies on judgement of experts to translate qualitative information to quantitative estimates. The important methods are:
• Jury of executive method
• Delphi method
2. Time series method: This generates forecasts on the basis of an analysis of the historical time series. The important methods are:
• Trend projection method
• Exponential smoothing method
• Moving average method:
3. Casual methods: These are more analytical than the previous methods. They seek to develop forecasts on the basis of cause effect relationship specified in an explicit quantitative manner. The important methods are:

• Chain ratio method
• Consumption level method
• End use method:
• Econometric method

Uncertainties in demand forecasting:

• Data about past and present markets: (Lack of standardization, Few observations, Influence of abnormal factors.)
• Methods of forecasting (Inability to handle unquantifiable factors, Unrealistic assumptions, Excessive data requirements.)
• Environmental changes: ( Technological, Governmental, International scenario)

How to cope with uncertainties:

Conduct analysis with data based on uniform and standard definitions.

Ignore the abnormal observations

Choose method appropriate to the situation.

Monitor changes in environmental factors.

Consider alternative scenarios and their impact on market.

Conduct sensitivity analysis to assess the impact on the demand for unfavorable and favorable variations of the determining factor from their most likely levels

Step 6: Market planning:

A market planning usually has the following components:

Current market situation

• Market situation – Site, growth, consumer aspirations, buying behavior.
• Competitive situation – major competitions their objectives, strategies, strengths etc.
• Distribution situation
• Macro environment – effect of social, political, economic, technological etc. factors.

Opportunity and Issue analysis:

In this section a SWOT analysis is conducted. ( Strength, weakness, opportunity and threat)

Objectives: Clear cut, specific and achievable.

Market Strategy cover the following:

• Target segment
• Positioning
• Product line
• Price
• Distribution
• Sales force
• Sales promotion
• Advertising
• To enable the product to reach a desired level of market penetration, a suitable marketing plan, covering pricing, distribution, promotion and service needs to be developed.

Technical analysis:

Analysis of technical and engineering aspects is done continuously when a project is being examined and formulated. The purpose of the technical analysis is

• To ensure that the project is technically feasible, that all inputs required for the project are available.
• To facilitate the most optimal formulation of the project in terms of technology, size, location and so on.

Technical analysis would cover the following issues:

1. Manufacturing Process / Technology: This would include the Choice of Technology
• Plant capacity
• Principle inputs
• Investment out and production cost
• Use by other units
• Product mix
• Latest developments
• Ease of absorption

Appropriateness of technology: These would refer to those methods of production which are suitable to local, economics, social and cultural conditions.

Whether the technology protects ecological balance?

1. Technical arrangements: Satisfactory arrangements must be made to obtain technical know how needed for the proposed manufacturing process. When collaboration is sought the following aspects must be worked out:
• Nature of support from collaborators during each stage of the project.
• Process and performance guarantees in terms of plant capacity, product quality and consumption of raw materials and utilities.
• License and royalty fee
• Benefit of collection agreement and manner of sharing management control.
2. Material inputs and utilities: Technical analysis must define the materials ands utilities required, specifying their properties and setting up their supply programme. Material inputs may be classified into 4 broad categories:
• Raw materials classified into:( Agricultural products, Mineral products, Livestock forest products, and Marine products)
• Processed industrial materials and components. (Represent important inputs and Analysis should cover the total requirement, sources, prices etc.)
• Auxiliary materials and factory supplies chemicals, packing materials, oils, grease etc.
• Utilities power, water, fuel, steam etc.
3. Plant capacity:

Plant capacity is the production capacity or volume of units that can be produced during a given period of time. It may be

Feasible normal Capacity – (FNC) Capacity attainable under normal working conditions ® calculated on the basis of installed capacity, technical conditions of plant, shift pattern, down time for maintenance and holidays.

Nominal maximum capacity (NMC) – Capacity that is technically attainable, corresponds to the installed capacity guaranteed by the supplier of the plant.

Factors affecting plant capacity decisions are: Technology requirement, input constraints, investment cost, market conditions, resources of the firm, and government policy.

Location and site:

Location refers to Broad area like city, industrial zone and Site refers to Specific area or piece of land where the project would be set up. The choice of location would depend on:

• Proximity to raw materials.
• Proximity to market
• Availability of infrastructure ® power, transportation, water, communication
• Labour availability
• Governmental policies
• Other factors (Climate, Living conditions, Pollution, Ancillary units)

The site selection would depend on the cost of site. Two or three alternative sites ,must be considered and evaluated with respect to cost of land and cost of site preparation and development.

Machineries and equipment

The requirement of machinery and equipment depends on production technology and plant capacity and also the type of project. To determine the kinds of machinery required the following procedure may be followed:

• Estimate the likely levels of production overtime
• Define various machining and other operations
• Calculate machine house for each type of operation
• Select machineries and equipment for each function.

The equipment required may be classified into the following types:

Process, Mechanical, Instruments, Control, Internal transportation, Others

Constraints in selecting machineries and equipments may be:

• Limited availability of power
• Difficulty in transport
• Workers not able to operate
1. Environmental aspects:

A project may cause environmental pollution in various ways hence these aspects must be properly examined.

1. Project chants and layouts:

Once the data is available on the principle dimensions of the project, charts and lay out must be prepared. The important charts and lay outs drawings are:

• General functional layouts
• Material flow diagram
• Production line diagram
• Transport layout
• Communication layout
• Plant layout
1. Schedule of project implementation:

As part of the technical analysis a project implementation is also prepared. Following information is required for this:

• List of all possible activities from project planning to commencement of production
• Sequence in which various activities have to be performed.
• Time required for each activity
• Resources required
• Implication of putting more resources or less resource than normally required.
1. Work schedule:

The work schedule reflects the plan of work concerning installation as well as initial operation.

1. Need for considering alternatives:

There are alternative ways of transforming an idea into a concrete project. These alternates may differ in one or more of the following aspects:

• Nature of project
• Production process
• Product quality
• Scale of operation and time phasing
• Location

FINANCIAL ANALYSIS

Financial analysis of a project is carried out to ensure that a satisfactory return is earned on the investment made in the project. Financial analysis would cover the following aspects:

• Cost of project
• Means of Financing
• Estimates of sales and production
• Cost of production
• Working capital requirement and its financing,
• estimates of working results (profitability projections)
• projected cash flow statement
• projected balance sheets.

Cost of project represents the sum of all items of outlay associated with a project which are supported by long term funds. It is the sum of outlays on the following: i. Land and site development, ii. Building and civil works, iii. Plant and machinery, iv. Technical know how and engineering fees, v. miscellaneous fixed assets, vi. Preliminary and capital issue expenses, vii. Provision for contingencies, etc.

Means of Financing: To meet the cost of project the following sources of finance or means of finance may be available: share capital (Equity and Preference capital),

Term loans, debenture capital (Non convertible and convertible debentures) , deferred credit, incentive sources ( Capital subsidy, tax deferment and exemption) and miscellaneous sources ( unsecured loans, public deposits and lease and hire purchase finance).To determine the specific means of finance for a given project the following should be taken care: i. Norms of regulatory body and financial institutions, and ii. Key business considerations namely cost, risk, control and flexibility.

Estimating sales and production: the starting point of profitability projections is the forecast for sales revenues. In estimating sales it is reasonable to assume that capacity utilization would be somewhat low in the first year and rise thereafter gradually to reach the maximum level in the third or fourth year of operation.

Cost of production: The major components of cost of production are: Material cost, utilities cost, labour cost and factory overhead cost. The material cost comprises the cost of raw materials, chemicals, components and consumable stores required for production. The cost of utilities is the sum of the cost of power, water and fuel. The labour cost includes the cost of all manpower employed in the factory. Factory overheads refer to the expenses on repair and maintenance, rent, taxes and insurance on factory assets.

Working capital requirement and its financing: In estimating the working capital requirement and planning for its financing the following must be borne in mind: the build up of current assets till the rated level of capacity is reached, the maximum permissible bank finance and the margin requirements against various current assets.

Estimates of working results (profitability projections):

The profitability projections or estimates of working results are prepared based on

• Cost of production
• Total administrative expenses
• Total sales expenses
• Expected sales
• Gross profit before interest
• Total financial expenses
• Depreciation
• Operating profit
• Other income
• Profit and loss before taxation
• Provision for tax
• Profit after tax
• Dividend
• Retained profit and
• Net cash accrual

Projected cash flow statement: The cash flow statement shows the movement of cash into and out of the firm and its net impact of the cash balance with the firm.

Projected Balance sheet: The balance sheet showing the balance in various asset and liability accounts reflects the financial condition of the firm at a given point of time.

CHAPTER 3

PROJECT CASH FLOWS

Estimating cash flows – the investment outlays and the cash inflows after the project is commissioned – is the most important, but also the most difficult step in capital budgeting.

A project which involves cash outflows followed by cash inflows comprises of three basic components. They are,

1. Initial investment: Initial investment is the after-tax cash outlay on capital expenditure and net working capital when the project is set up.
2. Operating cash inflows: The operating cash inflows are the after-tax cash inflows resulting from the operations of the project during its economic life.
3. Terminal cash inflow: The terminal cash inflow is the after-tax cash flow resulting from the liquidation of the project at the end of its economic life.