1 Chapter 3: Project Identification
§ Overview of Project Identification
§ Sources of Project ideas
§ Project concept/profile
§ Tools for Identifying Investment Opportunities
§ Prioritization & Ranking
§ Project Rating Index
Addis Ababa University School of Commerce
2 3.1 overview of Project Identification
Definition
§ Project Identification is a repeatable process for
documenting, validating, ranking and approving
candidate projects.
§ The project identification stage attempts to answer the
questions:-
§ How do projects come about?
§ Where do projects come from?
§ Why are projects where they are?
Project analysis and evaluation 3/22/2025
3.2 SOURCES OF PROJECT IDEAS
§ Analyze the Performance of Existing Industries- profitability
& capacity util.
§ Examine the Inputs and Outputs of Various Industries
§ Review Imports and Exports
§ Study Plan Outlays (for d/t sectors) and Governmental
Guidelines to industries
3.2 SOURCES OF PROJECT IDEAS
§ Look at the Suggestions of Financial Institutions and
Development Agencies
§ Investigate Local Materials and Resources- ways of
adding value to them
§ Analyze Economic and Social Trends
§ Study New Technological Developments
§ Draw Clues from Consumption Abroad
3.2 SOURCES OF PROJECT IDEAS
§ Explore the Possibilities of Reviving Sick Units
§ Identify Unfulfilled Psychological Needs
§ Attend Trade Fairs
§ Stimulate Creativity for Generating New Product Ideas
– modification, rearrangement, magnification, reduction,
combination, etc
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3.3 Tools for Identifying Investment Opportunities
§ There are several tools or frameworks that are helpful in
identifying promising investment opportunities. The
more popular ones are:
§ Porter model
§ Life cycle approach
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7 3.3 Tools for Identifying Investment
Opportunities
Porter Model
§ According to Michael Porter the profit potential of an industry depends on the
combined strength of the five basic competitive forces.
Forces Driving Industry Competition
§ Threat of New Entrants
§ Rivalry Among Existing Firms
§ Threat of Substitute Products
§ Bargaining Power of Buyers
§ Bargaining Power of Suppliers
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3.3 Tools for Identifying Investment
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Opportunities
Life Cycle Approach
§ Many industrial economists believe that most products evolve
through a life cycle that has four stages:
§ Pioneering stage
§ Rapid growth stage
§ Maturity and stabilization stage
§ Decline stage
§ Investment in the pioneering stage, may have a low return and negative NPV.
However, it may create options for participating in growth.
Project analysis and evaluation 3/22/2025
9 3.4 PRIORITIZATION & RANKING
§ Apply when there are two or more projects.
§ We divide the prioritization process into the following
key steps:
i. Collection – you must collect and gather all the data
about your projects.
ii. Ranking – you must develop and use a ranking model
that includes criteria for prioritizing.
iii. Verification – you must approve the ranked projects.
Addis Ababa University School of Commerce
Factors to be considered
Compatibility with the Promoter
§ It Fits the Personality of the Entrepreneur
§ It is Accessible to Him
§ It offers him the Prospect of Rapid Growth and High
Return on the Invested Capital
Factors to be considered
Consistency with the Government Priorities
§ Is the Project Consistent with the National Goals and
Priorities?
§ Are there any Environmental Effects Contrary to
Governmental Regulations?
§ Can Foreign Exchange Requirements of the Project be Easily
Accommodated?
§ Will there be Any Difficulty in Obtaining the License of the
Project?
Factors to be considered
Availability of Inputs
§ Are the Capital Requirements of the Project within Manageable Limits?
§ Can Technical Know-How Required for the Project be Obtained?
§ Are the Raw Material Required for the Project Available Domestically
at a Reasonable Cost? If the Raw Materials Have to Be Imported, Will
there be Problems?
§ Is the Power Supply for the Project Reasonably Obtainable from
different sources
Factors to be considered
§ Adequacy of Market- size of market must fit prospect of
adequate sales volume. Factors are:
§ Total Present Domestic Market
§ Competitors and Their Market Share
§ Export Markets
§ Sales and Distribution System
§ Projected Increase in Consumption
§ Barriers to the Entry of New Units
§ Economic, Social and Demographic Trends
§ Patent Protection
Factors to be considered
§ Reasonableness of Cost – cost structure enables to
realize acceptable profit with a price
§ Cost of Material Inputs
§ Labour Costs
§ Factory Overheads
§ General Administrative Expenses
§ Selling and Distribution Cost
§ Service Cost
§ Economies of Scale
Factors to be considered
Acceptability of Risk Level – risk charactering the project.
Factors to consider:
§ Technological Changes
§ Competition from Substitutes
§ Competition from Imports
§ Governmental Control Over Price and Distribution
16 3.5 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
Project analysis and evaluation 3/22/2025
3.5 PROJECT RATING INDEX
Factor Rating Factor
Factor Weight
VG G A P VP score
5 4 3 2 1
Input availability 0.25 ü 0.75
Technical know-how 0.10 ü 0.40
Reasonableness of cost 0.05 ü 0.20
Adequacy of market 0.15 ü 0.75
Complementary relationship
with other products 0.05 ü 0.20
Stability 0.10 ü 0.40
Dependence on firm’s
strength 0.20 ü 1.00
Consistency with
governmental priorities 0.10 ü 0.30
Rating Index 4.00
18 3.6 Project concept/profile
§ Once a project idea has been conceived, the next stage is to
describe the idea so that it can be prioritized and moved on to
the next stage in the process.
§ This may involve the preparation of a project identification
report or project concept or profile.
§ It is developed to have a clear idea of what the proposed project
is supposed to be and what are the hopes to achieve.
Project analysis and evaluation 3/22/2025
19 3.6 Project concept/profile
A project concept or profile should be short & include answers to the
following questions:
1. Justification and Purpose
§ What is the purpose of the project, what does it intend to achieve?
§ What problem is the project addressing?
§ What demands, needs or opportunities is the project addressing?
§ What are the main alternative ways for meeting the project’s
objectives?
§ What existing information sources were, or can be used, in
identifying and developing the project?
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3.6 Project concept/profile
2. Beneficiaries and Stakeholders
§ Who will benefit from the project?
§ Who identified the project?
§ Who has a share or stake in the project?
§ How have project beneficiaries and other stakeholders participated in the
identification of the project?
3. Resource and Institutions
§ What potential resources may be available for implementing the project?
§ Which organizations are to be involved in project planning and implementations?
4. Policies and Plans
§ How does the project proposal fit into any sector or regional plans?
§ Does the project fit into current policies?
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3.6 Project concept/profile
5. Impacts
§ What are the likely major positive and negative social impacts of the project?
§ What are the likely positive and negative environmental impacts of the project?
6. Support
§ What is the level of political and administrative support for the project?
§ Does the project have the support of beneficiaries and/or local communities?
7. Risks
§ What are the chances of the project achieving its objective?
§ What are the main risks associated with the project?
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