M.B.A IV Semester Course FM-10
PROJECTS PLANNING,
ANALYSIS & MANAGEMENT
LESSONS 1 TO 14
INTERNATIONAL CENTRE FOR DISTANCE EDUCATION
AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,
GYAN PATH, SUMMERHILL, SHIMLA-171005
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M.B.A IV Semester Course FM-
PROJECTS PLANNING,
ANALYSIS & MANAGEMENT
LESSONS 1 TO 14
INTERNATIONAL CENTRE FOR DISTANCE EDUCATION
AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY,
GYAN PATH, SUMMERHILL, SHIMLA-
CONTENTS
- CHAPTER – 1 INVESTMENT OPPORTUNITIES: THE PRELIMINARY STEPS SR. NO. TOPIC PAGE NO.
- CHAPTER – 2 GENERATION OF PROJECT IDEA
- CHAPTER – 3 MARKET AND DEMAND ANALYSIS
- CHAPTER – 4 DEMAND FORECASTING
- CHAPTER – 5 PROJECT TECHNICAL ANALYSIS
- CHAPTER – 6 FINANCIAL ANALYSIS OF THE PROJECT
- CHAPTER – 7 CAPITAL STRUCTURE PLANNING
- CHAPTER – 8 PROFITABILITY ANALYSIS AND FINANCIAL PROJECTIONS
- CHAPTER – 9 BREAK – EVEN ANALYSIS
- CHAPTER – 10 CASH FLOW STATEMENTS
- CHAPTER – 11 METHODS OF PROJECT APPRAISAL
- CHAPTER – 12 PROJECT IMPLEMENTATION PRACTICES IN INDIA
- CHAPTER – 13 SOCIAL COST-BENEFIT ANALYSIS
- CHAPTER – 14 PROJECT DESIGN AND NETWORK ANALYSIS
equipment, scale of production, location, incentives, and time phasing. The task of indentifying a feasible and promising project is somewhat difficult. Moreover it is interrelated with the government policies, infrastructural development and skill of people. Project identification is concerned with collection, compilation and analysis of economic data for the eventual purpose of locating possible opportunities for investment and with the development of such opportunities. According to Peter F. Drucker, projects can be divided into three categories: additive, complementary and breakthrough. Additive opportunities, which enable the decision-maker to better, utilize the existing resources with out in any way involving a change in the character of business. These opportunities, involve minimum disturbance to the existing state of affairs and hence at the least risk. Complementary opportunities involve the introduction of new ideas and such do lead to a certain amount of change in the existing structure. Breakthrough opportunities, on the other hand involve fundamental change in both the structure and character of business. These opportunities involve minimum disturbance to the existing state of affairs and hence the least risk. The element of risk is greater in the case of complementary opportunities and is greatest in the case of breakthrough opportunities. As the element of risk increases, it becomes more and more important to precisely define the scope and nature of the project objective and to select best possible approach so as to minimize both resource consumption and risk and to optimize the return or gains. 1.3 SOURCES OF PROJECT IDEAS
1. Observation Observation is the first thing which creates the path to deeper understanding of any subject. Human mind has an infinite capacity to observe and to innovate and deduct. The observant mind continuously comes across situations that can be utilized to develop investment opportunities. The observation may be made during the course of one’s routine occupation or otherwise. The dearth of a particular article or services may for instance lead to the development of an industry, which can provide the article or service in short supply. The availability of a specified type of raw material or skill may lead to yet another type of industrial activity. Observation of the existing processes can sometimes lead to new opportunities and financially beneficial project ideas. The process of deductions is on many occasions used to supplement and rationalize project ideas based on pure observation. In innovations units it often becomes necessary to depend upon the deductive process for the development of new approaches to the existing problems. 2. Trade and professional magazines Tread and professional magazines provide a very fertile source of project ideas. The statistics and information given by these magazines and reports of professional bodies often reveal opportunities, which can be eventually developed into investment proposals. It is very important for every person who is involved in the development of new investment opportunities to remain in touch with the latest development in his own field of specialization. It is also necessary for him to keep in touch with latest developments in other fields which may be horizontally or even vertically liked with his own line of specialization. Study of technical and professional literature also stimulates thinking and help in the process of development of new project ideas. 3. Bulletins of Research Institutes
Bulletins of research institutes are also an important source of information for new project ideas and opportunities. These bulletins generally give the broad outlines of the new processes or products developed by research institution.
4. Documents published by the Government In most developing countries where planed development has been accepted as an approach towards the removal of poverty, the plan document published by the Government provides a very useful source of project ideas. The plan document generally analyses the existing economic situation in a country and also pinpoints the investment opportunities, which fit into the overall planning effort. Considerable information can therefore, be gathered from the plan document. Departmental publications of various department of Government also provide useful information, which can help in the development of new project ideas. The project idea is a user-friendly concept of what a project should be like. It is the raw expression of the desire of the project sponsoring body to achieve something. The exact form in which the project idea is expressed is immaterial. In order to avoid unnecessary communications between the project sponsoring body and the project formulation team, the project idea should indicate broad objectives of the sponsor and limit these in time, space function and structure. In case no limitation is envisaged, the sponsoring body should state so and leave the project formulation team in no doubt about it. 1.4 CRITERIA FOR SELECTING A PARTICULAR PROJECT After gathering a large number of project profiles the entrepreneur should consider the following criteria for selecting a particular project: 1. Investment size
Professional manager, who have worked in multinational companies, should think of starting medium-sized units only. Those who do not possess any prior experience should start with small ventures.
2. Location
A new entrepreneur should locate his project to the extent possible in and around the state headquarters. There are many backward areas around cites. It is necessary to have such a location so to attract competent managers. This will also facilitate liaison with the state electricity Board, State Industrial development Corporation and various other agencies. Tax concession available for locating the plant at a particular place also be taken care of.
3. Technology
The first project should not be a product, which requires high technology, necessitating foreign technical collaboration. It is better to go in for product with a proven technology that is indigenously available. It makes life easier to begin with.
4. Equipment
The entrepreneur should select the best equipment as per advice of experienced technical consultants. He should not compromise on quality of the equipment. Many entrepreneurs enter into some sort of a deal with the equipment manufacturers for a “kick-back” and in the process sacrifice quality.
5. Marketing
It is not advisable to get into a project particularly the first, which would mean survival amidst cut-throat competition involving direct selling to the ultimate consumer. One should go in for products, which have unfulfilled demand.
1.8 PROJECT FEASIBILITY ANALYSIS
A Project feasibility analysis includes market analysis, technical analysis, financial analysis and social profitability analysis. Although every feasibility analysis is different and tailored to suit the product, its goal is to identify the existing strengths and weakness of the project.
The starting point of a project analysis is the establishment of objectives to be attained. The next stage is the pre-selection stage- the advisability of having an in depth study. The analysis stage consists mainly of three factors-markets, technical and financial analysis. A market analysis is a method of screening projects ideas as well as means of evaluating a project’s feasibility in terms of the market. A market analysis should cover the following areas: v A brief market description the market area, methods of transportation, existing rates of transport, channels of distribution, and general trade practices. v An analysis of past and present demand, determination of quantity value of consumption and identification of the major consumers of the product. v An analysis of past and present supply, broken down as source (whether imported of domestic), as well as information to assist in determining the competitive position of the product, such as selling prices, quality and marketing practices of competitors. The technical analysis for a project feasibility study established whether the project is technically feasible or not, and whether it offers basis for the estimation of costs. Moreover, it provides an opportunity for a consideration of the effect of various technical alternatives on employment, ecology, infrastructure demands, capital service, support of other industries, balance of payments and other factors. A technical analysis should review the techniques of processes to be applied and should incorporate:
- A description of the product, including specification relating to its physical, mechanical and chemical properties, as well as the uses of the product.
- A description of the selected manufacturing process, showing detailed flowcharts and presenting alternative which may have been considered and the justification for the adoption of the selected process.
- A determination of the plant size and production schedule, which includes the expected volume for a given time period on the basis of start-up and technical factors.
- Selection of machinery and equipment, including specifications, equipment to be purchases and its origin, quotations from suppliers, delivery dates, terms of payment, and a comparative analysis of alternatives in term of cost, reliability performance and spare parts availability.
- Identification of plant’s location and as assessment of its desirability in terms of its distance from raw material source and markets. For a new project, this part may include a comparative study of different sites, indicating the advantages and disadvantages of each.
- A design of the plant layout and an estimate of the cost of the erection of the proposed building and land improvements.
- A study of the availability of raw materials and utilities including a description of physical and chemical properties, quantities needed, current and prospective costs, terms of payment, location and sources of supply, and continuity of supply.
- An estimate of labour requirements including a detailed break-down of direct and indirect labour requirements, and the supervision required for the product.
- A determination of the type and quantity of waste to be disposed of, together with a description of the waste disposal method, its costs, and the necessary clearance from proper authorities.
- An estimate of the production cost of the project. In the financial analysis of this feasibility study, the emphasis is on the preparation of financial statements, so that the project may be evaluated in terms of the different measure of commercial profitability followed by the magnitude of financing which requires the assembly of the market and also technical cost estimated in various Performa statements. If it is necessary to have more information on which to base an investment decision, a sensitivity analysis or possibly a risk analysis may be conducted. This financial analysis should include:
a. For projects that involve new companies, statements of totals projects cost, initial capital requirements, and cash flows relative to the project schedule. For all projects financial projection for future time periods, including income statements, cash flows, and balance sheets. b. For all projects, supporting schedules for financial projection, stating the assumption made as to the collection period of sales inventory levels, payments periods of purchases and expenses, and the element of production cost selling, administrative and financial expenses. c. For all projects, a financial analysis showing returns on investments, return on equity, break- even volume, and price analysis. d. For all project, if necessary, a sensitivity analysis to identify items which have a substantial impact on profitability or possibly a risk analysis. For all small entrepreneurs, the studies conducted during the analysis stage of the project provide the material for an assessment. If positive results are obtained, the entrepreneur, in seeking finance, will want to prepare an investment proposal. The planners or government officials, however, having obtained positive conclusions from the economic feasibility study will want to evaluate the element of social profitability. The purpose of the investment or loan application is to convince a lender (financial institution) that the project is a desirable investment; that it not only possesses the potential but that the proposed management team has the capability to achieve the potential. The investment proposed normally contains:
- General information on the product, company, history, the nature of the industry and the reputation and qualification of the exiting or proposed management.
- A description of the project, which usually consist of extract from economic feasibility studies and includes information on such items as market, production, selected manufacturing methods (with detailed indication of the cost of equipment and operational expenses) and a financial statements.
- Miscellaneous information, such as the steps taken for the implementation of the project and the qualification of the technical envisaged or selected.
1.14 TERMINAL QUESTIONS
- Describe briefly the aspects of business environment that need to be monitored as well as the dimensions along which a firm may appraise its strengths and weakness for identifying investment opportunities.
- Discuss the criteria for selecting a particular project.
CHAPTER-
GENERATION OF PROJECT IDEA
STRUCTURE
2.0 Learning Objectives 2.1 Introduction 2.2 Corporate Appraisal 2.3 Scouting for Project Ideas 2.4 Preliminary Screening 2.5 Project Rating Index 2.6 Self Check Exercise 2.7 Summary 2.8 Glossary 2.9 Answers to Self Check Exercise 2.10 References/Suggested Readings 2.11 Terminal Questions
2.0 LEARNING OBJECTIVES:
- To understand how project ideas are generated.
- To learn about the screening of project ideas.
2.1 INTRODUCTION Proper project idea generation and screening is the utmost importance. So due attention is required while screening alternate projects, this lesson is devoted to the following aspects: Corporate Appraisal; Scouting for project ideas; Preliminary screening; and Project Rating Index 2.2 CORPORATE APPRAISAL For the purpose of identification of investment opportunities a reasonable appraisal of the strength and weakness of the company should be made. Following are the broad areas in terms of a company’s strength and weaknesses:
Marketing and distribution Marketing and distribution of the products and services of the prospective project is an important aspect to be given due consideration in order to ensure the success of the project. Following dimension of this project should be specifically considered;
v Market image v Product line v Distribution network v Brand loyalty
Examination of the inputs and outputs of various industries An analysis of the inputs required for various industries many throw up project ideas. Opportunities exist when:
- Materials, components and other supplies are presently being procured from distant sources with attendant time leg and transportation costs, and
- Several firms produce internally some components/parts, can be supplied at a lower cast by a single manufacturer who can enjoy economic of scale. Similarly, a study of the outputs of the existing industries may reveal opportunities for adding value through further processing of main outputs, by-products, as well as waste products.
Review Imports and Exports
A time series analysis of import statistics is helpful in understanding the trend of imports of various good and the potential for import substitution. Likewise, an examination of export statistics is useful in learning about the export possibilities of various products.
Study Plan Outlays and Government Policy for Industries
The study of government policy and the direction of public expenditure can unfold numerous investment opportunities. The geographical areas, which the government as a matter of public policy wants to develop can be source of promising project ideas.
The government plays a very important role in our economic. “Its proposed outlays in different sector provide useful pointers toward investment opportunities. They indicate the potential demand for goods and services required by different sectors.
A very valuable source of information to estimate the scope for further investment is the Guideline to industries published annually by the Department of industrial Development, Government of India. This publication provides information about the structure and location, production performance, licensed and installed capacity, export, and future scope of various industries.
While the governmental projections are often a good starting point; they must be viewed with some caution. Often they are not well grounded. It is helpful to remember the words of Alvin Hanson: “No one reading the plans can fail to be impressed by the frequent unrealism of these assumptions. So much appears to be contingent on the realization of the unrealizable.”
Consideration of the suggestions of Fanatical Institutions and Developmental Agencies
In a bid to promote development of industries in their respective states, state financial corporations, state industrial development corporations, and other developmental bodies conduct studies, prepare feasibility reports, and offer suggestions to potential entrepreneurs. The suggestions of these agencies are helpful in identifying promising projects. Investigate Local Materials and Resource A search for project ideas may begin with an investigation into local resources and skills. Various ways of adding value to locally available materials may be examined. Similarly, the skill of local artisans may suggest products that may be profitably produced and marketed. Analysis of Economic and Social trends A study of economic and social trends is helpful in projecting demand for various goods and services. Changing economic conditions and consumer preferences provide new business
opportunities. For example, a greater awareness of the value of the time is dawning on the public. Hence, the demand for timesaving products like prepared food items ovens, and powered vehicles has been increasing. Another change can be seen is the incising desire for leisure and recreational activates. This has caused a growth in the market for recreational products and services.
Study New Technological Developments
There is a large network of research in India under the umbrella of the council of scientific and industrial Research and other bodies. New products for new processes and technologies for existing product developed by research laboratories may be examined for profitable commercialization. Draw Clues Consumption Abroad Entrepreneurs willing to take higher risk may, identify projects for the manufacture of products or supply of services that are new to the country but extensively used abroad. Automatic vending machines, entertainment parks, pre-fabricated houses, and fast food restaurants are example of projects belonging to this category. Explore the Possibility of reviving sick Units Industrial sickness is rampant in the country. There are innumerable units, which have been characterized, as sick. These units are either closed or face the prospect of closure. Significant proportion of sick units, however, can be nursed back to health by sound management, infusion of further capital and provision of complementary inputs. Hence, there is a fairly good scope for investment in this area. Such investments typically have a shorter gestation period because one does not have to begin from scratch. Indeed, in many cases, marginal efforts would suffice to revive such units. Identify Unfulfilled Psychological Needs For well-established, multi-brand product groups like bathing soaps, detergents, cosmetics, toothpastes, the question to be asked is not whether there is an opportunity to manufacture something to satisfy an actual physical need but whether there are certain psychological needs of consumer’s which are presently unfulfilled. To find out whether such an opportunity exists, the technique of spectrum analysis is useful. This analysis is done in the following manner: i. Important factors influencing brand choice are identified. ii. Existing brands in the market are positioned on a continuum in respect of the factors identified step (1). iii. Identification of Gaps, which exist in relation to consumer psychological, needs. Attend Trade Fairs National and international trade fairs provide an excellent opportunity to get to know about new products and developments. These fairs also provide an opportunity to know the changes in the field of technology. Stimulate creativity for Generating New product Ideas Thinking along the following lines may generate new product ideas: Modification, rearrangement, Reversal, Magnification, Reduction, Substitution, Adaptation and Combination.
II. Foreign exchange is now available more easily, and III. Supplies of certain basic industries raw materials have been augmented substantially. Adequacy of the market The size of the present market must offer the prospect of adequacy sales volume. Further, there should be a potential for growth and a reasonable return on investment. To judge the adequacy of the market the following factors have to be examined. v Total present domestic market v Competitors and their market shares v Export markets v Quality-price profile of the product vis-a-vis competitive products v Seles and distribution system v Projected increases in consumption v Barriers to the entry of new units v Economic, social, and demographic and trends favourable to increased consumption v Patent protection
It may be emphasized there that barring reversionary aberrations, the demand for most of the products in India has been growing secularly. This trend would continue because of the low levels of per capita consumption in India. Fortunately, from the point of view of entrepreneurs, the Indian economy unlike most developed, western economics is not a share shift economy wherein the growth in demand for a product is likely to be at the expense of the demand for others.
Reasonableness of cost
The cost structure of the proposed project must enable it to realize an acceptable profit with a competitive price. The following should be examined in this regard.
v Costs of material inputs v Labour costs v Factory overheads v General administration expense v Selling and distribution costs v Service costs Economies of scale
Acceptability of Risk Level
The desirability of a project is critically dependent on the risk characterizing it. In the assessment of risk a difficult task, indeed-the following factors should be considered:
v Vulnerability to business cycles v Technological changes
v Competition from substitutes v Competition from imports v Governmental control over price and distribution
2.5 PROJECT RATING INDEX
When a firm is evaluating a large number of project ideas regularly, it may be helpful to streamline the process of preliminary screening. For this purpose, a preliminary evaluation may be translated in to a project-rating index. The steps involved in determining the project-rating index are as follows:-
- Identify factors relevant for project rating.
- Assigning 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.
- For each factor multiply the factor rating with the factor weight to get the factor score.
- Add all the factor score to get the overall project-rating index.
Once the project-rating index is determined, it is compared with a pre-determined hurdle value to judge whether the project is prima facie worthwhile or not.
2.6 ELF CHECK EXERCISE
- Marketing and ________is a key area of a company to be appraised for finding its strength and weaknesses.
- _______is the lifeblood of a business.
- To identify unfulfilled psychological needs of consumers ________technique is used.
2.7 SUMMARY
It is imperative to give due attention to proper screening of project ideas. Effort should be made to identify those projects which appear to be prima-facie viable and promising. Once such projects have been identified, they should be subjected to rigorous screening. It is often taken for granted that there is an abundance of good and worthwhile projects, which can be identified rather easily. However, note that choosing good projects is akin to selecting under-valued securities using fundamental analysis. For this purpose the effect of various affecting the viability of the project should be studied and evaluated.
2.8 GLOSSARY
Corporate Appraisal: Overall assessment of a company’s operations
Brand loyalty: Positive image towards a brand and dedication to purchase it repeatedly
Import substitution: Replacing foreign imports with domestic production
CHAPTER – 3
MARKET AND DEMAND ANALYSIS
STRUCTURE
3.0 Learning Objectives 3.1 Introduction 3.2 Situation analysis and specification of objectives of market and Demand Analysis 3.3 Collection of secondary Information 3.4 Conduct of market survey 3.5 Features of the market 3.6 Self Check Exercise 3.7 Summary 3.8 Glossary 3.9 Answers to Self-Check Exercise 3.10 References/Suggested Readings 3.11 Terminal Questions
3.0 LEARNING OBJECTIVES:
- To understand the collection of secondary information.
- To understand how a market survey is done.
- To study the features of market. 3.1 INTRODUCTION In almost all cases, the first step in project analysis is to estimate the potential, size of the market for the product proposed to be manufactured (or service planed to be offered) get an idea about the marker share that is likely to be captured. Put differently, market and demand analysis is concerned with answering two broad questions. What is the likely aggregate demand for the product/service? What share of the market will the proposed project enjoy?
These are very important, yet difficult, in project analysis Intelligent and meaningful answers to them call for an in-depth study and assessment of various factors like patterns of consumption growth , income and price elasticity of demand, composition of the market, nature of competition, availability of substitutes, reach of distribution channels, so on and so forth.
Given the importance of market and demand analysis, it should be carried out in a orderly and systematic manner. This lesson is devoted to the following aspects of market and demand analysis.
v Situational analysis and specification of objectives of market and demand analysis. v Collection of secondary information v Conduct of market survey v Features of the market
3.2 SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES OF MARKET AND
DEMAND ANALYSIS
In order to get a “feel” for the relationship between the product and its market, the project analyst may informally talk to customer, competitors, middleman, and others in the industry. Wherever-possible, he may look at the experience of the company to the learn about the performance and purchasing power of customers, actions, land strategies of competitors, and practices of the middleman. If such a situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues a formal study need not be carried out, particularly when cost and time consideration so suggest. In most cases, of course, a formal study of market and demand is warranted. To carry out such a study, it is necessary to spell out its objectives clearly and comprehensively. Often this means that the intuitive and informal goals that guide situational analysis need to be expended and articulated with greater clarity. A helpful approach to spell out objectives is to structure them in the form of questions. Of course, in doing so, always bear in mind how the information generated will be relevant in forecasting the overall market demand and assessing the share of the market the project will capture. This will ensure that questions not relevant to market and demand analysis will not be asked unnecessarily: 3.3 COLLECTION OF SECONDARY INFORMATION In order to answer the questions listed while delineating the objectives of the market study, information may be obtained from secondary and/ or primary sources. Secondary information is information that has been gathered in some other context and is already available. Primary information, on the other hand, represents information that is collected for the first time to meet the specific purpose on hand. Secondary information provides the base and the starting point for market and demand analysis. It indicates what is known and often provides leads and clues for gathering primary information required for further analysis. This section looks at the secondary information and the following at the information. General Sources of Secondary information The importance sources of secondary information useful for market and demand analysis in India include, Census of India, National sample survey plan Reports, Statistical abstract of the Indian Union, Industries, and Annual Reports of the Development wing. Ministry of Commerce and Industry, Annual Bulletin of statistics Exports and Imports, Techno-Economic Surveys, Industry potential Surveys, The stock exchange Directory, Monthly studies of production of selected industries, Monthly Bulletin of Reserve Bank of India and the publications of Advertising Agencies. Evaluation of Secondary Information While secondary information is available economically and readily (Provided the market analyst is able to locate it), The market analyst should seek to know: v What was the objective for collecting the information? v Who gathered the information? v When was the information gathered? v When was it published?