Proje ct Analys is a nd E va luation

Nov.2 020

CH AP T E R O NE
Conce pt of Pr oject a nd Planning

C o n t e n ts
1.0 Aims and Objectives
1.1 Introduction
1.2 Development: Concepts & Contents
1.2.1 National Planning
1.2.2 Sectoral, (Sub-Sectoral) Planning
1.2.3 Project Planning
1.3 The Concept of a Project
1.4 Types of Projects
1.5 Projects & Plans (Relationship)
1.6 Project & Program
1.7 The Project Cycle
1.7.1 Project Identification
1.7.2 Project Preparation
1.7.3 Project Appraisal
1.7.4 Project Implementation
1.7.5 Project Evaluation
1.8 Summary
1.9 Model Examination Questions

1.0 Aims & Objectives

The main objectives of this unit is to:

 understand general consideration in development
 understand the concept of a project
 understand the relationship between plan and project, program and project
 identify t ypes of project
 identify stage of project planning process i.e., project cycle.


Harambee College CD E Page 1
 P r o j e c t A n a l y s is a n d E v a l u a t i o n
Nov.2 014

1.1 Introduction
Projects are one of the several instruments to achieve part icular object ives in a process o f
development. Thus, projects have to be discussed as an integral part of the nat iona l
development strategy for they have to be evaluated in clo se reference to the overall
development po licy o f a country. Pro jects have been described as "the cutting edge" o f
development, they embody the policy choices flo wing fro m development objectives and acts
as the vehicle or the medium of the described social changes.

As such then, projects are the means through which development targets are achieved and are
considered to be a tangible benefit for the project beneficiaries. Without visible projects on
the ground, policies, strategies, and plans for development are simply administrative.

1.2 Develop ment: Concepts And Contents

Development is of utmost significance for all countries. It is especially so for the
underdeveloped economies which accounts for more than three fourth of the world's
population. To grasp the process that involves initiat ions and sustenance o f development of it
is necessary as a first step that we understand as to what it implies and how to indicate the
economic progress that it makes possible. In the broadest sense, development aims at an
improvement in the quality of life. This invo lves progress in the econo mic sphere as also the
non-economic fields.

Economic development encompasses growth i.e., rise in per capita income of the people and
all that goes to improve the essential elements that make for a better qualit y o f life such as
progress in education, health and nutrition and a cleaner natural environment. Development
planning is concerned wit h many decisions most of which are related to capital expenditure
on projects and their financing.

There are three distinct stages through which development planning is carried out:
 National Planning
 Sectoral Planning
 Project Planning


Harambee College CD E Page 2
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

 National Planning: Nat ional planning refers to the drawing of a nat ional plan
indicating projection of the economy on a macro economic basis. It requires the
formulation of overall economic and social objectives (called development strategy)
ident ifying the constraints such as shortage of investment, foreign exchange or skilled
labour, and maintaining consistent inter relat ion between the various sectors and
regions of the economy. The national economy is divided into sectors such as;
agriculture, manufacturing industries, service industries, infrastructure and social
service

 Sectoral, (Sub-Sect oral) Pla nning: Once the nat ional planning is done, planning
will be developed on sub-sectoral basis. The analysis o f each sector will provide an
indication for investment, emplo yment, export etc. Before embarking on an individual
project, it is frequently necessary to possess detailed knowledge o f the sector
concerned (e.g., chemical, textile, engineering, iron and seet, these referred to as sub-
sector with manufacturing sector) especially when the project is fairly large in relat ion
to the sector.

 Project Pla nni ng: Once a sectoral (sub-sectoral) plan has been drawn up, the way is
clear for project planning. This consists of two states.

A. A pre-feasibility study, which concentrates on the market identification and on the

costing o f a project to satisfy the market, and a rough financial plan and economic
analysis.
B. A detailed feasibility study, it will be undertaken when the investor are known, and the
availability of finance will be discussed and will consists of a very detailed description
and analysis of the project.
Harambee College CD E Page 3
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.3 The Concept of a Project

In most cases, it's easier to describe than to define a project. However, a project is referred to
as:
"It is a proposed undertaking involving a complex set of econo mic activit ies in which
scarce resources are committed in expectation of benefits that exceed the resources in
order that investment decisions are wisely carried out in the area of development plan,
formulation implementation."

In a brief statement, a project is just a proposal to invest money in certain act ivities wit h the
expectation of return in the future.

The easiest way to define a project is to outline the co mmo n characterist ics that it might be
expected to have:
A. a project involves the investment of scarce resources in the expectation of future
benefits.
B. a project can be planned, financed and implemented as a unit. Often projects are the
subject of special financial arrangement and have their own management.
C. a project has a specific starting and finishing time in which a clearly defined set of
objectives is expected to be achieved. Usually achievement of those object ives can be
measured.
D. a project has a conceptual boundary, usually geographical but sometimes
organizational.

In general, a project is a specific activity with specific starting po int and specific ending point
intended to accomplish a specific objectives and with a pre-determined input resources.

Check your progress questions

1. Define what is project ?.
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ __ .
Harambee College CD E Page 4
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.4 Types of Projects

One can identify four major types of projects; experimental pro ject, pilot project,
demonstration project and production project.

A. Experimental project: attempt to address a problem in an inno vative manner using the
alternative approaches. E.g., crop innovation.
B. Pilot project: the pilot project strengths the applicabilit y of the experience derived
from experimental project to local level. It can highlight the problem of
implementation: test the effectiveness o f the approach adopted and can provide
valuable training experiences for personnel. An important function of a pilot project is
to test the replicability of the project to other areas and to other beneficiaries.
C. Demonstration project: it's basically a form to exhibit new techniques or approaches of
a pre-tested experiment. E.g., Demonstration farms used to disseminate new crop
varieties among farmers.
D. Production project: the production pro ject has the ro le o f increasing productivit y,
adjusting to scale requirements and a high degree of replicability.

Check your progress questions

2. What are types of project ?.
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ __ .

1.5 Projects and Plans (Relationship)

Planning in general is a conscious effort to direct human energy for the purpose of securing a
rationally desirable end. Planning is a means to an end. It's a guide to achieving certain
objectives in an optimum manner by means of an orderly sequencing o f act ivit ies. In other
words, planning is a form of decision making in using scare resources in selective and
economical ways to achieve a pre-determined objectives or goals.
Harambee College CD E Page 5
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Planning is necessary because:

 it helps to make necessary arrangements in advance of possible challenge
 it helps an organization to think ahead and anticipate future events
 it gives clear picture of future events to measure and control actual activities
 it helps to identify operational problems of past performance and future corrections

· Plan requires projects: a sound plan require a great deal o f knowledge about exist ing
and potential project. Since a plan lay down growth rate target, for Gross Do mest ic
Product (GDP), investment, employment etc, a realistic assumpt ion must be established
with regard to such growth. This pre-suppose a knowledge o f the rate at which good
projects can be planned.

Thus, good and realistic plan cannot be formulated in the absence of a great deal of project
planning and without proper economic appraisal of projects.
· Project requires plan: since projects commit scarce res, project select ion is meaningfu l
only when it is placed wit hin the broader development-planning framework. The best
economic appraisal of projects cannot be made without referring framework and plans and
policies. To choose the right project one must have an est imate of demand for the product.
But the estimation of demand could be more realistic if the plan is also realistic.

Check your progress questions

3. Describe the relationship between project and programme ?.
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ __ .

1.6 Projects and Program

Policies are implemented through programs usually overall lengthy t ime scale o f five to ten
years. Programs have broadly expressed develo pment object ives. while projects are the
building blocks of programs and are usually o f shorter duration. A project is a means by
which national, regional local, etc plans are made operational. This means the plan has to be
elaborated into "package of action".
Harambee College CD E Page 6
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

The package of action can be divided into two broad categories. These are:
A. Program: which is the first step in plan elaboration and
B. Project: the second step in plan elaboration.

Program, which is a bigger package of act ion is composed of a number o f pro jects aiming at
attaining one or more related objectives o f plan. Project on the other hand achieve goals
which lead to the accomplishment of specific objectives within program.

The following are the basic difference between program and project.
 A program is broader in scope than a project.
 A program is a domain out of which project can be found.
For example, if we think o f extensio n program under this program we could ident if y
different projects like irrigation, crop production, Honey production etc.
 A program has general objective while pro jects have a specific object ives. For
example, if the objective of the extension program is self food efficiency, the objective
of the pro ject could be increasing crop production, milk production, honey production
etc which are more specification than being general.
 Project has a specific project area while program don't have a specific program area.
 Projects have specific beneficiary groups. For example, if one establishes a cattle
raring project at Somalia region, that doesn't mean that every Somalia will be willing
to buy your product rather there will be a specific client who will purchase your
product like Yemen etc.

The difference and similarities between project and program can be summarized in the
following table:

Project Program
Difference  It is specific in objectives  Has got general objectives
 Has specific areal/geographic unit  May not have specific area
 Has clearly determined and allocated  May not have specific target group
fund  May not have clear and detailed
 Has specific life financial allocation
 May not have specific time of ending


Harambee College CD E Page 7
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

 Has purpose/objectives
Similarities  Require input (financial, manpower, material)
 Generate output (goods or services)
 Operate over space and time


Chec k Your Progress Exercise

4. Compare and contrast project and programme?.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ .

1.7 The Project Cycle

Projects usually go through a series of identifiable stages. The various stages through whic h
project planning proceeds from inception to implementation are often called "the project
cycle." It is the pro ject's life cycle through which the projectadvances fro m infancy to
maturity. There are a number o f models of the project cycle. One of the most known models
of project is developed by Mr. W.C. Baum of the world Bank has coined the term "pro ject
cycle" in 1970, and his model of project cycle refer Baum's model of project cycle.

However it is naïve to think that a project cycle as a successive stages overtime. There are in
fact, much feedback between the project cycle stages, and so metimes, so me stages have to be
undertaken simultaneously. It is preferable, therefore, to think of the pro ject cycle in the form
a computer program, which describes the process more accurately.

The separate stage of project planning are:

 Identification
 Preparation
 Appraisal
 Implementation and
 Evaluation



Harambee College CD E Page 8
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1. Project Ide ntificati on

Projects identification amounts to finding projects, which could contribute toward achieving,
specified development objectives. Or the first stage in pro ject cycle is to ident ify an idea,
which enable to launch a project. The quest ion at this stage is where do project ideas come
from?

Sources of project ideas

We can dist inguish two level where projects ideas are born: the macro level and the micro
level.

At the macro level project idea comes from:

- National, sectoral or regional plans and strategies supplemented by special studies
often called opportunity studies, conducted with the explicit aim of translating national
and sectoral programmes into specific projects.
- Constraints in the development process due to shortage of essent ial infrastructure
facilities, problems in the balance of payments, etc
- A government's decisio n to correct social and regio nal inequalit ies or to satisfy basic
needs of the people through development projects.
- Unusual events such as drought, floods, earthquake, etc
- A possible external threat that necessitate projects aiming at achieving, for example,
self sufficiency in basic materials, energy, transportation etc.
- Multi or bilateral agreement

At the micro level, project idea emanate from:

- The identification of unsatisfied demand or need
- The existence of unused or underutilized natural or human resources and the
perception of opportunities for their efficient use
- The init iative of private or public enterprise in response to incent ives provided by the
government
- The necessity to complement or expand investment previously undertaken: and
- The desire of local groups or organization to enhance their economic independence
and improve their welfare.
Harambee College CD E Page 9
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Once to some pro ject ideas have been put forward, the first step is to select one or more of
them as potentially viable. This calls for a quick preliminary screening by experienced
professional who could also modify some o f the proposal. Following the preliminar y
screening, promising project options should be investigated in a systemat ic manner. This
requires the preparation of brief reports that clearly indicates in sufficient and detail those
project versions that are promising and suggests those projects options that should be
eliminated. Reports of this type are often called pre-feasibility or pre investment studies.

Content of the pre-feasibility study

The pre-feasibility study should briefly discuss
- The objectives of the project
- The nature and size of the demands for the output or the needs that it would sat isfy,
together with the foreseen beneficiary groups
- The availability of the most important materials and human inputs
- Basic alternative technologies available and their merits and weakness
- Approximate investments and operation costs as hell as expected revenue
- Rough estimate of financial and economic return
- Any major factors that is likely to have an important effect on the project

2. Project Pre parati on

If the pre-feasibilit y study indicates that the projects is, prima facie, pro mising and further
work is justified, the project enter the stage of preparation.

The project is now being seriously considered as a definite invest ment action and detailed
planning of the idea can begin project preparation (somet imes called project formulation)
covers the establishment of technical, econo mical and financial feasibilit y. Decision have to
be made on the scope of the project, location, and site etc. Complete technical specifications
of dist inct proposals accompanied by full details of financial and econo mic costs and benefit s
are the outcomes of the project preparation stage. The project now exists as a set tangible
proposals.
Harambee College CD E Page 10
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Project preparation is probably the mo st important stage in pro ject planning. Crucial cho ices
relating to the structure of the project are made at this stage and so me o f them are virtually
irreversible. Crucial choices at the stage of preparation should be made properly by
employing the right criteria.

3. Project Appraisal
Project appraisal can be defined as second look at a project report by a person or an inst itution
that is in no way involved in its preparation. It helps in taking an entirely independent view o f
the project. Appraisal is the comprehensive and systematic assessment of all aspects of the
proposed projects.

Appraisal highlights wide area in the project with the ultimate objective of strengthening them
adequately so as to ensure final success of the project. The main object ive of the appraisal is
to improve and renovate the project with the cooperation o f the promoter (financing
agencies). It's in this stage that the bank will judge whether the project is acceptable or
unacceptable.

Appraisals should cover at least seven aspects o f a project, each o f which must have been
given special consideration during the project preparation phase:
1. Technical: does the proposed project work in the way suggested?
2. Financial: have the financial requirement of the project been properly calculated, their
sources identified and reasonable plans made for their repayment ? Where this is
necessary?
3. Commercial: how will the necessary inputs for the project be supplied and are the
arrangements for the disposal of the product satisfactory?
4. Incentives: does things go as they are planned?
5. Economic: does the proposed project consistent from the view po int of nat ional
development?
6. Managerial: does their exist capable manager to run the planned project successfull y
and are they given sufficient power and scope to do what is required?
7. Organizational: is the project organized internally and externally into units, etc so as
to allow the proposals to be carried out properly, and to allow for change as the project
develops?
Harambee College CD E Page 11
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Frequent ly these quest ions are the subjects o f a specialized appraised report. On the basis o f
this report, final decisio ns are made about whether to go ahead wit h the project or not.
Following appraisal, some projects may be discarded.

4. Project Imple me ntation

In this stage, funds are actually disbursed to get the project set up and running. Translating
project plan into actual invest ment and operation is one of the mo st critical and difficult task.
No matter how sophist icated or detail the project preparation work, it has no value unless it is
transformed into action or implemented.

Implementation can be defined as a project stage which covers the actual development or
construction o f the project up to the point at which it becomes fully operational. It includes
monitoring of all aspects of the work or activit y as it proceeds. It's where the earlier
preparations and designs, plans and analysis are tested in the highlight of realit y. The project's
objectives are realized only when it is successfully implemented.

Implementation stages begins immediately after the final decisio n on the project and ends
when it starts rendering the benefit envisaged. While in earlier stages of project planning there
was more thinking and less action, in this stage more actions and less thinking is needed.

Project implementation, even though it may involve complex decisions, is essentially a logical
and systematic approach. Now a days planning the implementation stage of a project
explicitly is one of the activit y in project preparatio n. The better and more realistic a project
implementation plan is, the more likely it is that the plan can be carried out effectively and the
expected output or benefit realized.

Project analysts generally divide the implementatio n phase into three different time periods.
These are:
1. The investment period: when the major project investments are undertaken.
2. The development period: when the project's production builds up.
3. The life of a project: when full development is reached.
Harambee College CD E Page 12
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5. Project Eval uati on

Once a project has been carried out, it is often useful (but not always done) to look back over
what took place, to compare actual progress with the plans, and to judge whether the decisions
and actions taken were reasonable and useful. This we call evaluation.

Evaluation can be defined as a systemat ic and periodical gathering, analyzing and interpreting
of inputs, information to see the effects and impacts of a development programme/pro ject in
order it may be adjusted where necessary.

This kind of analysis can help not only in the management of the project after the init ia l
construction phase, but will also help in the planning of future project. Experience with one
project can give rise to new ideas for extensio n of the project. Generally evaluation of a
project helps to determine whether the objectives sets were realistic, given the capacit ies wit h
which and the circumstances in which they had to be fulfilled, to assess the impact of the
project activities.

Chec k Your Progress Exercise

1. Discuss project life cycle b y addressing all cycles sequentially?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ __ .
Harambee College CD E Page 13
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.8 Summary
A project is a proposal by individual or organization to invest money in a certain act ivit ies
with the expectation of return in the future. However, it could be better to define a pro ject in
terms of the common characteristics that might be expected to have.

We may identify four types of pro jects: experimental, pilot, demonstration and production
types of project. To undertake project in a good manner it requires realist ic plan and for
effect ive planning to exist it requires good and realist ic project planning proceeds from
inception to implementation referred to as the 'project cycle'. Mr. W.C.Baum has coined the
term pro ject cycle and develop a model o f project cycle which advances fro m infancy to
maturity. The separate stages of project planning are: Identificat ion, preparation, appraisal,
implementation and evaluation.

Somet imes it may be difficult to think that a project cycle as a successive stage overtime,
since there is much feedback between each stage in pro ject cycle and as so me stages are
undertaken simultaneously.

1.9 Answer to Check Your Progress Exercise

1. Refer to Sections above each progress exercises

Harambee College CD E Page 14
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

M O DE L E XAM I NAT I O N Q UE S T I O NS
1. What is a project?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
2. What is the relationship between project and plan, and project and program?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. What are the different sources of project idea at a macro and micro level?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. Write what project lifecycle mean and the various stages through which the project passes.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
5. Argue on the issue of "It would be naïve to think that a project cycle as a successive stage
overtime".

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
6. Why companies undertake project evaluation?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 15
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

CHAPTER TWO
Project Planning and Appraisal

Contents
2.0 Aims and Objectives
2.1 Introduction
2.2 Project Appraisal by Financial Agencies
2.3 What is Project Appraisal
2.4 Steps and Methodologies for Appraisal
2.4.1 Application Form
2.4.2 Scrutiny of Standard Application Form
2.4.3 Site Inspection
2.5 Summary
2.6 Model examination questions

2.0 Aims and Objectives

The main objectives of this unit is
- to understand what project appraisal means
- to understand the steps taken to appraise project
- to understand the methodologies used to appraise project.
Harambee College CD E Page 16
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2.1 Introduction
In order for a project to be viable it has to gone through a series of rigorous testing. This is
basically done at an appraising stage of project lifecycle. Market, technical, inst itutional
feasibility, commercial profitability and social cost benefit analysis which are pre requisite for
an invest ment project should, therefore, be defined and crit ically examined on the basis o f
alternative solution already reviewed.

2.2 Project Appraisal by Financial Agencies

Financial institution and development banks are looked upon as engines of econo mic
development. They endeavor to accelerate the pace of economic growth in conformit y wit h
national objectives, plans and priorities. in a situation where resources are scarce and demands
for funds for all type of project are there, project appraisal helps in select ing projects worth
financing.

An entrepreneur conceive the idea of setting up a project after an assessment which indicates
that there is demand for the project to be set and the profit margin would be attractive. After
identifying the project, he has to do certain preparatory work. The stage is not ripe for the
applicant to approach financial institution for financial assistance.

2.3 What is Project Appraisal?

Appraisal can be defined as a second outlook at the project report by a person who is no wa y
involved in its preparation. It helps in taking an ent irely independent view o f the project.
Appraisal is comprehensive and systemat ic review of all aspects of a project. The main
object ive o f project appraisal is to provide a rule for deciding whether to accept or reject a
project.

Appraisal highlight weak areas in the project with the ultimate object ives of strengthening
them adequately so as to ensure final success of the pro ject. Appraisal will improve and
revamp the project with the cooperation of the promoter.

Appraisal of a project is done by a team o f officers and they take the prime responsibilit y in
regard to the conclusio ns emanat ing fro m the appraisal. Appraisal is also a jo int exercise by
Harambee College CD E Page 17
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

the promoters and the financing institution. And the appraisal should be made within a t ime
bound. This is because any delay ness in implementation will distort profitabilit y project ion
and makes success of the project a very difficult task.

Appraisal involves a careful checking of the basic data, assumpt ions and methodology used in
the project formulation, review of the work plan, cost estimates and proposed means o f
financing, an assessment of organizational and management aspects and finally the financial,
economic and social benefits expected from the project.

Appraisal, however, does not set down a categorical statement of the long range prospects of
the project. It only provides broad guidance to the financial inst itution to form its judgment
regarding the future profitabilit y and prospects of a particular project and to workout terms
and conditions for its assistances.

2.4 Steps and M ethodologies for Appraisal

2.4.1 Applicati on For m

The financial institutions (banks) require that an entrepreneurs seeking financial assistance
should furnish detailed information about the project in a prescribed form. The form is
sufficient ly comprehensive and covers all-important aspects of a pro ject. It is so designed that
an analysis of the information therein should enable the financial inst itution to judge the
viability of the project. It is essential that a proper guidance is provided to the promoters for
completing the application forms.

2.4.2 Scrutiny of Standar d Application For m

First step in detailed appraisal is in depth study o f information submitted by the entrepreneur.
The main issue that the appraiser have to look into are:
· adequate data has been furnished against every item
· information furnished under several items could be cross checked
· both in scrutiny of the preliminary informat ion and the processing of the applicat ion,
personal discussion between the official of the bank and representatives o f the
borrowing concerns are both necessary and desirable. They help to reduce avo idable
correspondence and thus facilitate an expeditious disposal of the application
Harambee College CD E Page 18
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

· clarification/additional information called for whether necessary.

A project is likely to receive favorable consideration and detailed appraisal is taken if:
· it has priority according to governmental guidelines
· the promoters inspire confidence
· the technology to be adopted is well proven
· the product manufactured have market potential
· the project cost is not unreasonable high
· the promoter's contribution is not unduly low and
· profitability estimates are conservative and indicate repayment of proposed
institutional loan within, say, about 10 years

A proposal is rejected without detailed appraisal if it has some of the following features.
· Banker's report on the promoter is not satisfactory
· If promoter are reported to have indulged in illegal and ant i-social activit ies e.g.,
smuggling, foreign exchange violation, income tax evasion
· If financial position of the promoter company is not satisfactory
· If the industry to which the promoters belo ng has low priorit ies or included in the
negative list in government guidelines
· Cost of the project is unduly high
· Promoters contribution is unusually low (i.e., when the promoter has low capital in the
eye of the banker)
· When location of the proposed unit has apparent disadvantage e.g., far from the source
of raw material, market
· If second hand equipment has to be acquired which is too old (most of the t ime banks
don't finance those project which uses obsolete machine, equipment, etc)
· Availability of raw material in terms of quantity and quality is doubtful.
· When products to be manufactured don't have sufficient market potential
· When there exist difficulty in understanding the technological know how etc.
Harambee College CD E Page 19
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

While preferences will be given to those project which

· would utilize any industrial wastes or agricultural surplus as raw material
· are export oriented or import substitute
· are employment oriented
· are located in a specified backward or loss backward area
· would help in setting up of ancillary small scale units.

After an exhaustive investigation on the standard application form the third step in project
appraisal will be site inspection.

2.4.3 Site Inspecti on

Third step in project appraisal is site inspect ion by appraisal team consisting of technical and
financial offices. Inspection team should pay particular attention to assessing suitability of site
by ascertaining its distance from transport, source of raw material, market for end products,
timely availability of utilities like power supply, water supply, telecommunication etc.

Effluent disposal arrangement should be carefully scanned to ensure the safet y and cleanness
of the environment. Source of skilled and unskilled labor and availabilit y of socia l
infrastructure like: residential accommodation, school, college, hospital near the site may be
looked into.

During site inspection, the inspect ion team should discreetly collect market reports on the
promoters their financial strength, credibilit y and capacit y. Care should, however, be taken
that such enquiries do not result in any embarrassment (disappointment) for the promoter.

Generally a visit to the site of the project would give the o ffices of the financing inst itution. A
visual picture of the location of the site and will enable a better appreciation of the other
relevant question such as expenditure on development of land, arrangements for water supply,
power etc.
Harambee College CD E Page 20
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2.5 Summary
Financial institutions like banks are considered as the engine for the economic development of
one country. They accelerate development by injecting money to different project, which is
appraised by them.

Project appraisal invo lves in a careful checking of the basic data, assumpt ion and
methodology used in the project formulation, review o f the work plan, cost estimate and
proposed means of financing, an assessment of organizat ional and management aspects and
finally the financial, economic and social benefit expected fro m the pro ject by a person or
organization who is no way involved in its preparation.

The basic steps in appraising projects involves in scrutinizing of application form, scrutinizing
of standard application form and site inspection.
Harambee College CD E Page 21
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2.6. MODEL EXAMINATION QUESTIONS

1. Who involves in appraising project proposal?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
2. What are the main issues that the appraisals have to look in appraising project proposal?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. What is project appraisal?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. When shall the appraisal team accepts and rejects a project proposal?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
5. What are the various factors that has to be taken in to consideration during site selection?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 22
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

CHAPTER THREE

PROJECT EVALUATION AND ANALYSIS

1. Environmental Analysis

1.1 Introduction
Environmental Assessment (EA) is a process whose breadth, depth and type of analysis
depend on the nature, scale and potential environmental impact of the proposed project. EA
evaluate a project's potential environmental risks and impacts in it s area o f influence, examine
project alternatives, identities ways of improving selection, sit ing, planning, design and
implementation by preventing, minimizing, mitigating or compensating for adverse
environmental impacts and enhancing posit ive impacts and includes the process of managing
adverse environmental impacts throughout project implementation.

Project will have a significant impact on the environment. These could be both positive and
negative. The positive environment effects needs to be enhanced and the negat ive effects need
to be prevented or reduced thorough appropriate mit igation measures to achieve this, project
should be subject to an environmental assessment.

Public and government awareness o f the negat ive impact of development on the environment
has increased over the last thirt y years in developed and developing countries. The first move
to assess the environmental impact from development projects originated in the USA in t he
seventies. This led to the development of environmental impact assessment (EIA) methods,
which have been increasingly adapted and adopted by many other countries.

Concern for environmental degradation in Ethiopia has been growing in recent years. The
Ethiopian Federal Democratic Republic Constitution provides the basic and co mprehensive
principles and guidelines for environmental protection and management. The government is
currently developing the institutional and po licy framework for the implementation of
environmental assessment in the country. The constitution states that everyone has the right to
live in a clean and healt hy environment and the government will make every effort to provide
such an environment. The constitution also holds the government and the people of Ethiopia
Harambee College CD E Page 23
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

responsible for the preservation of natural resources and maintenance of eco logical balances.
The three most urgent areas of environmental concerns are:
1. The considerable land degradation including loss of nutrients owing to removal o f
animal manure a crop residues for use as a fuel and cattle feed
2. The low qualit y and availabilit y o f water, as a result of which only about one-fift h o f
the population has access to safe water.
3. The rapidly growing urban environmental problems including lack of sanitar y
facilities, inadequate refuse collection, and low standard of housing.

In essence, this environmental assessment is not ant i-development rather it is a means to

maintain the environment and for the sustainable development of the country's resources.

1.2 Environmental Impact Assessment

In environmental assessment there are two main level of assessment. One for impact of
projects i.e., Environmental Impact Assessment (EIA) and one for the impact of po licies,
plans and program Strategic Environmental Assessment (SEA). The later is beco ming a n
increasingly powerful tool to assess the impacts at the national or regional level of existing
policies and plans. In Environmental Impact Assessment (EIA) there are four major stages to
the process:

- Screening
- Scoping
- Impact Assessment and Evaluation – preparation of environmental impact statement
- Monitoring and Auditing

The overall Environmental Impact Assessment (EIA) process is illustrated in the fo llo wing
diagram.
Harambee College CD E Page 24
 P r o j e c t p l a n n i ng , Nov.20 14
A na l y s i s a n d M an a g e m e nt

Figure 1: Flow chart of simplified EIA process

Outcomes
Actions

Decisions to proceed
Review of projects to with environment
Screening
Assess if an EIA is assessment
Necessary
Potential and/or impacts
Identification of Major of project to assessed
Scoping
Environmental impacts of and evaluated
project
Magnitude and
Assessment of impacts, significance of impacts
Impact Prediction
and identification of and mitigation or
and Evaluation
Mitigation measures, and enhancement measures
Alternative options

Environmental Impact
Drafting of
Preparation and Statement
Environmental
consultation of draft and
final EIS Impact Statement

Public and statutory

Review and Decision Yes or no to project
Review of EIS, and
Making
Decision on whether to
Proceed

Public reports (part of

Monitoring of key Environmental environmental management
Environmental variables, Monitoring & system and/or plan
and auditing against Auditing
Standard/plan

Page 25
CDE
Harambee College
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.2.1 Screening
Screening is the initial review of a project to determine if an EIA is required. For certain types
of project it can be a mandatory requirement to undertake an EIA. For others it will be a
matter for decision by the relevant regulatory authority. For all major agricultural project it is
likely that an EIA would be required, and desirable.

1.2.2 Scopi ng
Once a decision has been made to commence an EIA the next exercise is to assess the likely
major impacts of the project on the environment. This is known as scoping an init ial
environment evaluation. This may identify ver y major adverse impacts o f the proposed
project, which mean an outright rejection o f the project. An example could be a proposed
development, which would have a major impact on the pack and be outside national policy.

On the other hand the evaluat ion may ident ify no possible significant adverse impact of the
project. When this is the case a full EIA will not be necessary and the project can mo ve on to
its implementation stage. These are unlikely to be many major agricultural projects, which fall
into this category.

1.2.3 Impact Assess ment &Evaluation

Following the decision to proceed with a full EIA the next stage of the process is the most
exhaustive and consequently expensive part of the assessment. This is the identification and
predict ion of all the environmental impact of the proposed project, their likely affects both
positive and negative, the way to enhance or mitigate these impacts. The outcome of this stage
will be a report of the assessment, this is commo nly called an Environmental Impact
Statement (EIS). The typical content of an EIA or EIS are given in Box 1.
Harambee College CD E Page 26
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Box 1 Typical contents of an environmental impact statement (EIS)

· Background information of project and area, including history of project and its
stakeholders and beneficiaries.
· Biophysical and socio-economic environmental description of the area, and assessment
of the quality and reliability of this data.
· Review of legislative and institutional environment affecting the project.
· Assessment of significance and degree of potential impacts (positive and negative) with
ranking of importance and, where possible, a quantitative and economic evaluation.
Including the active participation of project beneficiaries and those local communities
affected by project.
· Analysis and appraisal of different project options, including a without project option.
· Description of recommended mitigation measures for negative impacts, and of
measures to enhance positive impacts.
· Any institutional changes or requirements if the project is to be implemented.
· Recommendations or environmental monitoring, evaluation and auditing.

Depending upon the actual EIA the EIS may include recommendat ion on whether the project
should proceed of the changes, which should be made to its design to allow it to proceed to
implementation. The EIS should also include recommendations on environmental monitoring
to take place after project implementation.

This stage of the EIA should also be used to attempt an economic valuat ion o f the
environmental impact, which can then be used in the appraisal o f the project to help assess it s
overall viability. Often this part of the EIA can be a lengthy and expensive, part icularly where
it is necessary to assemble or survey baseline data. However, the investment on EIA and
valuation can be more than offset when negative impact are avo ided or reduced, and posit ive
impacts enhanced.
Harambee College CD E Page 27
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Check Your Progress Exercise

1. Discuss environmental impact assement?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

__ _ __ _ __ _ __ _ .

1.2.4 Monitoring & Envir on mental Auditi ng

When a project has moved to implementation the final stage of the Environmental Impact
Assessment (EIA) process, or a component of project management, is environmental audit ing.
This is linked to the environmental mo nitoring of the project. Auditing can be undertaken
either by the project itself or by an external agency. The objective of auditing is to assess the
impact of the project against established standard. For example, where an agricultural project
has included a major processing plant it could be monitoring o f water qualit y to make sure
that effluent from the plant is not exceedingly the agreed or mandatory levels.

Audit ing can also be linked to the socio-economic impacts of a pro ject. An irrigation project
may have the potential to increase water born diseases, and measure to mit igate these ma y
have been part of the project design, mo nitoring of healt h statistics and audit ing of these
figures can be used to assess if this impact has occurred or been mit igated against. Monitoring
and auditing require resources and a commit ment by the project operator and regulatory
authorities.
Check Your Progress Exercise
2. What is monitoring and environmental auditing?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ .

1.3 Timing of Environmental Assessments

A crucial factor with environmental assessment is when is it to be made in the development of
a project. In the past the environmental assessment of a project, if it happened at all took place
toward the end o f the development of the project. This would often have been after the
identification, design and financial/economic appraisal o f the project. But the environmental
viability of a project is essent ial for a successful and sustainable project. This to undergo the
Harambee College CD E Page 28
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

preparation of project leaving the environmental to the end o f makes no sense, especially, if
this assessment indicates that the project is not environmentally viable and sustainable.

It is, therefore, important that environmental assessment of projects and project options
commences as soon as a project has been identified. This could be only an initial evaluation to
rule out various options, which have serious environmental impacts. Later as the pro ject
develops more detailed assessments should take place alo ngside the more tradit ional
economic and financial assessments of projects. As discussed later in this unit the
environmental econo mic valuation should be a part of the overall cost benefit analysis of a
project.
1.4 Community and P ublic Participation
Participation of project beneficiaries is also crucial when undertaking an Environmenta l
Impact Assessment (EIA). Unless local communities have been involved in the original
ident ificat ion and design of a project, the onset of an EIA may be the first thing they know
about the project.

It is important to allow the participation of local communities in the assessment of potential

project impact possible alternatives. It is often they who will have to bear any adverse impacts
but hopefully enjo ying the positive impacts the project may bring, though this is not always
the case with some projects. To achieve this ver y early in the EIA process the loca l
communities as beneficiaries and stakeholders should be identified.

1.5 Environmental Impacts

Project will have its own positive as well as negat ive impact on the environment. For
example, if we take agricultural project, the impact of agricultural pro ject can be grouped into
seven broad heading. These are given below with some of the main areas of impact.

- Ecological impact: loss of fauna and flora (including deforestation)

- Impact on soil: erosion, salinisation, alkalinization, fertility and structure
- Hydrology: water quality, surface flow, flooding, pollution
- Socio-economic impact: crop production, nutrition, employment, and health
- Infrastructure: transport, water supply, telecommunication
- Socio-cultural: cultural sites, and archeological sites
Harambee College CD E Page 29
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.6 Valuation of Cost and Benefit With Regard to Environment

In principle, econo mic analysis are to take into account all costs and benefits of a pro ject.
With regard to environmental, impacts, however, there are two basic problems. First,
environmental impacts are often difficult to measure in physical terms. Second even whe n
impacts can be measured in physical terms, valuation mo netary terms is difficult. In spite o f
such difficulties, a greater effort needs to be made now "internalize" environmental costs and
benefits by measuring them in money terms and integrating these values in econo mic
appraisal.

Four key issues in measuring environmental costs and benefits are discussed hereunder;
a) Determining physical impacts and relationship
b) Valuing impacts in monetary terms
c) Discounting; and
d) Risk and Uncertainty

1.6.1. Physical Impacts a nd Relationshi p

The first step in environmentally sound economic analysis is to determine the environmental
and natural resource impacts of the project or policies in quest ion. These impacts are
determined by comparing the "with project" and the "wit hout project" impacts. The difficulty
in doing this varies greatly. For example, solid waste production of an industrial plant can be
estimated easily, whereas it is much more difficult to identify all the environmental impacts of
a trade policy reform, of air pollution, or even soil erosion on agricultural productivity.

For determining physical impacts, an economist will have to rely on the expertise o f
engineers, ecologists, agronomists, social scientists, and other specialists. The task is co mplex
in that so me physical relat ionships may not be known, may be stochast ic or may occur only
over the long-term.

1.6.2. Valuing t he Impacts i n Monetary Ter ms

A number of conceptual approaches have been developed for valuing physical impacts and
relationships. An environmental impact can show itself in a measurable change in productio n
or environmental quality. Different methods are appropriate depending on the types of effects.
(See Table 2 below).
Harambee College CD E Page 30
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.201 4

The methods and approaches discussed below are applicable or potentially applicable in
developing countries. The techniques are presented in decreasing order of reliance upon
market information, beginning with those that rely on actual market prices, and ending wit h
survey-based and other hypothetical methods.
Table 2 Chief Valuation Techniques
DIRECT VALUATION SURROGATE MARKET POTENTIAL EXPENDITURES
VALUES OR WILLINGNESS TO PAY
- Changes of productivity - Property values - Replacement costs
- Loss of earnings - Wage differences - Shadow project
- Defends expenditures - Travel costs - Contingent valuation
- Market goods as proxies

1.6.2.1 Market Based Methods

The primary feature of these methods is that they are based direct ly on market prices
productivity. They are applicable where a change in environmental qualit y affects actual
production or production capability.

i) Change in Productivity Approach

Development projects can affect production and productivit y posit ively or negatively. For
example, a land management project involving soil conservation measures, may yield
increased agricultural output. The incremental output can be valued by using standard
economic prices.

The environmental costs of reclaiming wet lands or of water pollution are now being
recognized. Where these affect fish catch eit her in the short-term or long-term the value o f
fish catch can be estimated directly by using actual or projected market prices.

ii) Loss-of-earnings Approach

Changes in environmental quality can have significant effects on human healt h. Ideally, the
monetary value of healt h impacts should be determined by t he individuals' willingness to pay
for improved health. In practice, "second best" techniques may be necessar y, such as valuing
earnings that are foregone through premature death, sickness or absenteeism; and increased
Harambee College CD E Page 31
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

medical expenditures. This approach may be relevant, for example, when considering road
and industrial plant safety, and projects that affect air pollution in major cities.

The "value of healt h" approach is often quest ioned on ethical grounds. It is argued that it
dehumanizes life, which is o f infinite value. In practice, however, society implicit ly places
finite values on human life and health when it makes policy and project decisions that affect
environmental quality, workers' health or safety, etc. If this were not so, we would be justified
in spending all of GDP on health improvements.

In this case of an increase or reduction in numbers of deaths, a first estimate is made by

evaluating the projected loss in earnings of the individual invo lved. The value o f an increase
or education in sickness can be approximated by adding medical costs to loss in earnings.

iii) Defensive or Preventive Expenditures

Individuals, firms, and governments undertake a variet y of "defensive expenditures" in order
to avoid or reduce unwanted environmental effects. Environmental damages are often difficult
to assess, but defensive expenditures may be determined more easily in mo netary terms than
direct valuations of the environmental good in question. Such actual expenditures indicate that
individuals, firms or governments judge the benefits greater than the costs. The defensive
expenditures can then be interpreted as a minimum valuation o f benefits. However, caution is
devisable with this approach, especially in cases where governments arbitrarily mandate
defensive expenditures having little or no relationship to market forces or free choices.

Check Your Progress Exercise

3. What are market based approaches of analysis?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ _ .

1.6.2.2. Methods Based on Surrogate Market Values

The methods and techniques described in this section use market information indirect ly. The
approaches discussed are the property value approach, the wage differential approach, the
travel cost method, and uses o f marketed goods as surrogates for non-marketed goods. Each
technique has it s particular advantages and disadvantages, as well as requirements for data
Harambee College CD E Page 32
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

and resources. The task of the analyst is to determine which of the techniques might be
applicable to a particular situation.

i) Property Value Approach

This approach, also referred to as the hedonic price technique, is a subset of the more general
land value approach. Its objective is to determine the implicit prices of specific characterist ics
of properties. When used in environmental issues, its purpose is to place a value on
improvements or deterioration in environmental quality.

The property value approach has been used to analyze the effect of air po llution in certain
areas. Where pollution is localized, the method compares prices of houses in affected areas
with houses of equal size and similar neighborhood characteristics elsewhere in the same
metropolitan area. The approach is based on the assumpt ion of a co mpet it ive real estate
market, and its demands on information and statist ical analysis are significant; therefore,
applicability to developing countries is limited.

ii) Wages Differential Approach

This approach is based on the theory that in a compet itive market the demand for labour
equals the value of the marginal product, and that the supply o f labour varies with working
and living conditions in an area. A higher wage is therefore necessary to attract workers to
locate in polluted areas or to accept risky work. Again, as in the case of the property value
approach, the wage different ial approach can only be fo llowed if the labour market is ver y
competitive. Also, the approach reflects only private, not social, valuation of health risks.

iii) Travel Cost Approach

This approach is most often used in analyzing the economic benefit s of recreational facilities
in industrial countries (parts, lakes, forests, wilderness, etc). Essentially the same approach
can also be used to value “travel t ime” in projects dealing with fuel wood and water
collection.

The surrounding area of a site is divided into concentric zones o f increasing distance,
representing increasing levels of travel cost. A survey of users should be conducted at the site
to determine the zone of origin, visitat ion rates, travel costs, and various socio-economic
characteristics. Users clo se to the site would be expected to make more use o f it, because the
Harambee College CD E Page 33
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

implicit price for them, as measured by travel costs, is lower than for more distant users.
Based on analysis of the questionnaires, a demand curve can be constructed and the associated
consumers‟ surplus determined. This surplus represents an est imate of the value of the
environmental good in question.

iv) Marketed Goods as Surrogates for Non-Marketed Goods

There are situations where environmental goods have close subst itutes that are marketed, and
where therefore the value to the environmental good in question can be approximated by the
observed market price. For example, the value of a non-marketed fish variet y can be valued at
the price of the most similar fish being sold in local markets.
Check Your Progress Exercise
4. Discuss methods of analysis in market surrogate value?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

__ _ __ _ __ _ __ _ .

1.6.2.3. Methods Based on Potential Expenditures or Willingness-to Pay

Somet imes it is not possible to estimate the benefits o f environmental qualit y protection or
improvements. In some of these cases it may be possible to estimate benefits by calculat ing
the costs of replacing the environmental services that have been or might be destro yed by a
project, or by estimat ing what people might be willing to pay (WTP) to protect an
environmental asset. Once again, however, great care needs to be exercise to avoid improper
valuation.

i) Replacement Cost Approach

Under this approach, the costs of replacing a damaged asset are est imated. The estimate is not
a measure of the benefit of avoiding the damage in the first place, since damage costs may be
higher or lower than the replacement cost. However, it is an appropriate technique if there is
compelling reason to restore the damaged asset, or certainty that it will be restored.

The replacement cost approach has been used to estimate the benefits of erosion prevent ion
measures by calculating the cost of the fertilizer that would be needed to replace the nutrients
Harambee College CD E Page 34
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

lost through so il erosion. The method applies only if, in the absence of erosion control
measures, the fertilizer would actually be applied.

ii) Shadow Project Approach

Used for evaluating projects with negative environmental impacts, this approach invo lves the
design and costing o f one or more “shadow projects” that would provide subst itute
environmental services to compensate for the loss o f the original assets. This approach is
essentially the same as the replacement cost approach; it is being ment ioned increasingly as a
way to make operational the concept of sustainabilit y at the project level. It assumes a
constraint for maintaining environmental capital intact, and could therefore be most relevant
when “critical” environmental assets are at risk.

iii) Contingent Valuation Method

In the absence of market information about people‟s preferences, the contingent valuat ion
method tries to identify them by posing direct questions about willingness to pay. Basically, it
asks people what they are willing to pay for a benefit, and/or what they are willing to accept
as compensation for tolerating a cost. This process of “asking” may be eit her through a direct
questionnaire/survey, or by experimental techniques in which subjects respond to various
stimuli in “laboratory” conditions. What is sought are personal valuations by the respondents
for increases or decrease in the quantity of some good, contingent upon a hypothetical market.
Willingness to pay is constrained by the income level o f the respondent, whereas willingness
to accept payments for a loss is not constrained. Estimates show that willingness to accept
tends to be several times greater than willingness to pay.

The continent valuation method has many shortcomings, however, including problems in
designing, implementing and interpreting questionnaires. While its applicability may be
limited, there is now considerable experience in applying this survey-based approach in
developing countries, e.g., to evaluate the qualit y of supply o f potable water and electricit y
services. In certain circumstances, the cont ingent valuation method may be the only available
technique for benefit estimation, and can be applied to commo n property resources, to
amenit y resources wit h scenic, ecological or other characteristics, or to other situations where
Harambee College CD E Page 35
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

market information is not available. Caution should be exercised in seeking to place a value
on the more abstract benefits of environmental assets, such as existence or intrinsic value.

Check Your Progress Exercise

1. Discuss project analysis method based on potential expenditure method?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

__ _ __ _ __ _ __ _ .
1.6.4. The Disc ount Rate Iss ue
After the physical effects of projects and policies have been determined and, where possible,
estimated in money terms, the next issue is the rate at which the cost and benefits streams are
to be discounted. This is a general issue in cost benefit analysis; but it is particularly important
with regard to environmental costs and benefits, since at least some of them are of long-term.

In standard analysis, past costs and benefits are treated as "sunk" and are ignored in decisio ns
about the present and future. Future costs and benefits are discounted to their equivalent
present value and then compared. In theory, in a perfect market, the interest rate measures
both the subjective rate of time preference and the rate of productivit y o f capital. These rates
are equated at the martin by the market, so that the rate at which individuals are willing to
trade present for future values in just equal at the mart in to the rate at which they are able to
transform present goods into future goods by capital investment.

Because of imperfect financial markets and government distortions introduced by taxat ion,
the rate of time preference and the rate of capital productivit y are not equal. Also, individual
decisions differ from social decisions in that individuals are mortal and societ ies are quasi-
immortal. Thus one strong reason for individual preference for the present – the certaint y o f
death coupled with the uncertainty of when it will occur – is absent fro m the communit y's
point of view. So, the community has reason to discount the future less than individuals.

In order to favor environmental projects that have benefit s accruing in the lo ng run, it has
been suggested that lower discount rates by used. This has a drawback, however, in that not
only environmentally sound activities would pass the cost-benefit test more frequent ly but
Harambee College CD E Page 36
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

also a larger number of projects generally would pass the test and thus lead to additiona l
environmental stress.

The main recommendations, therefore, are that:

(a) the standard opportunit y cost of capital be used (e.g., 10 percent) for environmental
cost-benefit analysis, as it is for NPV calculations and for co mput ing the IRR
comparator:
(b) short-and long-term costs and benefits be estimated as carefully as possible; and
(c) a rigorous analysis of non-monetary consequences (including those that might be
irreversible) be made to supplement standard cost-benefit analysis.
Check Your Progress Exercise
2. What is discount rate?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ .

1.6.5. Issues of Ris k and Uncertainty

Projects and policies alike involve risks and uncertainties. Risks are invo lved when
probabilities can be assigned to the likelihood of an event occurring, such as an industria l
accident. Uncertainty describes a situation where little is known about future impacts and
where therefore no probabilit ies can be assigned to certain outcomes, or where even the
outcomes are so novel that they cannot be anticipated.

Risk can be insured against and treated as a cost, but uncertaint y defies actuarial principles
because of novelty of outcomes. Uncertaint y is especially important in environmental issues.
As projects grow larger in scale and introduce novel substances into the environment, the
category of risk becomes less relevant and the category o f uncertain more relevant. The
proper response to risk is to count it as a cost in expected value formulat ions. The proper
response to uncertainty is likely a policy of general caution: if one cannot see ver y far ahead,
slow down.

Much work has been undertaken on the subject of risk and uncertaint y in project appraisal. In
practice, the way risk and uncertainty are included in project appraisal work is through
sensitivit y analysis, which determine how the IRR is dependent on different variables.
Harambee College CD E Page 37
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Analysis should also be undertaken that indicate how environmental features can affect the
IRR of a project and how the project might affect natural resources and the environment.

Check Your Progress Exercise

2. Discuss issues of risk and uncertainty?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ .
Harambee College CD E Page 38
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1.7. Su mmary
Incorporation of the effects of environmental degradation into public decisio n-making is an
essential step towards achieving economically efficient management of natural resources and
formulating a practical strategy for sustainable development. In particular, the economic
analysis of projects and policies can help a count y make invest ments of scarce resources that
contribute most to its overall objectives. “External factors” have often been neglected in the
past, but these should not be internalized to the extent possible. In this regard, rough
qualitative assessments early in the project cycle can yield valuable returns by identifying
environmentally unsound alternat ives and focusing on those that are more sound overall and
designing the latter to achieve sustainable development goals.

The principles discussed in this section have been applied to evaluating environmental costs
and benefits in only a limited number of actual situations. Therefore, more case stud y work is
necessary and perhaps could be carried out as part of project preparation. A major purpose in
such endeavor is to indicate orders of magnitude, rather than provide fine-tuned numbers. In
this fashion, some alternatives could be ruled out, and the key estimates for decision-making
identified and focused on.

At this t ime, the best one can do is to used cost-benefit analysis to the extent possible- and
push it to its acceptable limits. In addit ion, risks and consequences that cannot be measured in
monetary terms should be identified and rigorously analyzed. These two approaches - and
good judgment- are at present the best strategies for sound decision-making.

3.8 Answer to chec k Your Progress Exercise

1. Refer Sections above each progress questions.
Harambee College CD E Page 39
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Model Examination Question

1. What is Environmental Assessment and why it is undertaken?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
2. What are the four major steps involved in undertaking Environmental Impact Assessment?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. When does Environment Impact Assessment be undertaken?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

4. Is that necessary to participate the local community in Environmental Impact Assessment?

Why?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
5. What are the different approaches for valuing the impact of environment in mo netary
terms?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
6. Write about the issue of risk and uncertaint y in measuring environmental cost and
benefits?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 40
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2. Market a nd De mand Analysis

In most cases, the first step in project analysis is to estimate the potential size o f the market
proposed for to be manufactured. To put it different ly, market and demand analysis is
concerned with two broad issues; what is the likely aggregate demand for the product? What
share of the market will the project enjoy?

These are very important questions in project analysis. Because it calls for in-depth study and
assessment of various factors.

Given the importance of market and demand analysis, it should be carried out in an orderly
and systematic manner. The key step in such analysis are as follows:
- Situational analysis and specification of objectives
- Collection of secondary information
- Conduct market survey
- Characterization of the market
- Demand forecasting

2. 1 . Situati onal Analysis and S pecification of O bjectives

In order to get a 'feel' for the relationship between the product and its market, the project
analyst may informally talk to customer co mpetitors, middlemen, and others in the industry.
Wherever possible, he may look at the experiences of the company to learn about the
preferences and punishing power of customers, actions and strategies of competitors.

If such a situational analysis generate enough data to measure the market and enable us to
have a clear picture over projected demand and revenue, a formal study need not be carried
out, particularly when time and cost considerat ion so suggest. In most cases, of course a
formal study of market and demand is warranted.
The objectives of market and demand analysis in this case may be to answer the fo llowing
questions:
- Who are the buyers of air cooler?
- What is the total current demand for air cooler?
Harambee College CD E Page 41
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

- How is the demand temporarily distributed (pattern of sales over the year) and
geographically?
- What is the break-up of demand for air coolers of different size?
- What prices will the customers be willing to pay for the improved air cooler?
- How can potential customers be convinced about the superiority of the new cooler?
- What price and warranty will ensure its acceptance?
- What channel of distribution are most suited for the air cooler? What trade margin will
induce distributors to carry it?
- What are the prospects of immediate sales?

2.3 Collection of Sec ondary I nfor mation

In order to answer the questions listed while delineat ing the objective o f the market study,
information may be obtained from secondary and/or primar y sources. Secondary information
is information that has been gathered in so me other context and is already available. Primary
information, on the other hand, represents those informat ion which are co llected for the first
time to meet the specific purpose on hand. Secondary informat ion provides the base and the
starting point for market and demand analysis. It indicates what is known and o ften provides
leads and cues for gathering primary information required for further analysis.

2.4. Conduct of Mar ket Survey

For undertaking a market survey there is a need to have a sample, which represents the entire
market. Thus, sampling is the process of drawing a limited number o f subjects from a larger
population or universe. Since, the researcher cannot survey the ent ire universe or population
that they are interested, they usually draw a sample of subjects from the population for
investigation.

Steps in a Sample S urvey

Typically a sample survey consists of the following steps:
1. Define the target population: in defining the target populat ion the important terms
should be carefully and unambiguously defined. The target population may be divided
Harambee College CD E Page 42
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

into various segments which may have differing characteristics. For example, all
television owners may be divided into three to four income bracket.
2. Select the sam pling scheme and sam ple size: there are several sampling schemes,
simple random sampling, cluster sampling, sequential sampling, stratified sampling,
systematic sampling and non-probability sampling. Each scheme has its advantage and
limitations. The sample size, other things being equal, has a bearing on the reliabilit y
of the estimates – the larger the sample the greater reliability.
3. Develop the questionnaire: the questionnaire is the principal instrument for elicit ing
information fro m the sample of the respondent. The effectiveness of the quest ionnaire
as a device for eliciting the desired informat ion depends on its length, the t ype o f
questions, and the wording of questions. Developing the quest ionnaire require a
thorough understanding of the product, and its usage, imagination, insights into human
behavior, appreciation of subtle linguist ic nuances, and familiarit y wit h the tools o f
descriptive and inferential statistics to be used later for analysis.

Since the quality of the questionnaire has an important bearing on the results of market
survey, the quest ionnaire should be tried out in a pilot survey and modified in the light
of problems/ difficulties noted.
4. Recruit and Train the Field Investigators: recruiting and training of field
investigators must be planned well since it can be time consuming. Great care must be
taken for recruiting the right kind o f invest igators and imparting the proper kind o f
training to them.
5. Obtain information as per the questionnaire from the sample respondent:
respondent may be interviewed personally, telephonically, or by mail for obtaining
information. Personal interview ensure a high rate of responses. They are, however,
expensive and likely to result in biased responses because of the presence o f the
presence of the interviewer. Mail survey are economical and evoke fairly candid
responses. The response rate, however, is o ften law. telephonic interview, common in
western countries have very limited applicability in Ethiopia because telephone tarrifs
are high and low telephone connection.
Harambee College CD E Page 43
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6. Scrutinize the inform ation gathered: information gathered should be thoroughly

scrutinized to eliminate data which is internally inconsistent and which is o f dubious
validity. Sometimes data inconsistencies may revealed only after some analysis.
7. Analyze and Interpret the Inform ation: information gathered in the survey need to be
analyzed and interpreted with care and imagination. After tabulating it as per a plan of
analysis, suitable statistical investigation may be conducted, wherever possible and
necessary. For the purpose of statist ical analysis, a variet y of methods are available.
They may be divided into two broad categories; parametric and non parametric
methods.

Parametric methods assumes that the available or the attribute under study conforms to
some unknown distribution. Non-parametric methods do not presuppose any particular
participation.

Results of data based on sample survey will have to be extrapolated to the target populat ion.
Here it should be noted that the results of the market survey can be affected by:

i) non representative ness of sample

ii) imprecision and inadequacies in the questions,
iii) failure of the respondent to comprehend the questions
iv) deliberate distortion in the answer given by the respondent
v) checking on the part of the investigators
vi) slip shod scrutiny of data
vii) incorrect and inappropriate analysis and interpretation of data.

2.5. Characteristics of t he Mar ket

Based on the information gathered from secondary sources and through the market survey, the
market for the product may be described in terms of the following:
· Effective demand in the past and present
· Breakdown of demand
· Price
· Methods of distribution and sales promotion
Harambee College CD E Page 44
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

· Consumers
· Supply and competition
· Government policy

2.5.1 Effective Dema nd in Past and Prese nt

To gauge the effect ive demand in t he past and present, the starting po int t ypically is apparent
consumption which is defined as:

Production + Imports – Exports – Changes in Stock Level

In a competitive market, effect ive demand and apparent consumption are equal. however, in
most of the developing countries, where co mpetit ive markets do not exist for a variet y o f
products due to exchange restrict ions and controls on production and distribution. The figure
of apparent consumption may have to be adjusted for market imperfections.

2.5.2 Brea kdow n of Dema nd

To get a deeper insight into the nature of demand, the aggregate (total) market demand may
be broken down into demand for different segments of the market. Market segments may be
defined by (a) nature of product, (b) consumer good and (c) geographical division.

 Nature of product: one generic name o f subsumes many different products: for
example, commercial vehicles covers trucks and buses o f various capacities and so on
and so forth.
 Consumer groups: consumers of product may be divided into industrial consumers
and domestic consumers. Industrial consumers may be sub divided industry wise.
Domestic consumers may be further divided into different income groups.
 Geographical divisions: a geographical breakdown o f consumers, particularly for
products which have a small value to weight relatio nship and products which require
regular, efficient after sales services is helpful.

2 . 5 . 3 P ri ce
Price statistics must be gathered along with statistics pertaining to physical quant ities. It ma y
be helpful to distinguish the following types of prices.

Page 45
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

i) manufacturer's price quoted as FOB (Free on board) price or CIF (Cost, insurance
and freight) price
ii) landed price for imported goods
iii) average wholesale price, and
iv) average retail price

2.5.4 Method of Distributi on and Sales Pr omoti on

The method of distribution may var y with the nature of product. Capital goods, industrial raw
materials or intermediates, and consumer products tend to have differing distribut ion
channels. Further, for a given product, distribution methods may var y. Likewise, methods
used for sales promotion (advert ising, discount gift schemes etc) may var y fro m product to
product.

The method of distribution and sales promotion emplo yed present ly and their rat ionale must
be specified. Such a study may explain certain patterns of consumpt ion and highlight the
difficulties that may be encountered in marketing the proposed products.

2.5.5 Cons ume rs

Consumers may be categorized along two dimensions as follows:

 Demographic and Sociological: Age, Sex, Income, Profession, Residence,

Social bac kground.
 Attitudinal: Preference, Intentions, Attitudes, Habits and Responses


2.5.6 Supply and Competiti on
It is necessar y to know the exist ing source of supply and whether they are foreign or
domestic. For domest ic sources of supply, information alo ng the following lines may be
gathered location, present production capacity, planned expansio n, capacit y utilization level,
bottlenecks in production and cost structure.

Competition from substitute and near substitute should be special because almo st any product
may be replaced by some other product may be replace by so me other product as a result of
relative charges in price, quality, availability, promotional effort and so on.

Page 46
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2.5.7 Governme nt Policy

The role of government in influencing the demand and market for a product may be
significant. Governmental plans, policies, legislation and fiats which have a bearing on the
market and demand of the product under examinat io n should be spelt out. These are reflected
in: production target in national plans, import and export trade controls, import duties, export
incentives, excise duties, sales tax, industrial licensing, preferential purchase, credit controls,
financial regulation and subsidies/penalties of various kinds.

2.6 Demand F orecasting

After gathering information about various aspects of the market and demand from primar y
and secondary sources, an attempt may be made to estimate future demand. A wide range o f
forecast ing method is available to the market analyst. This may be broadly divided into two
categories: qualitative and quantitative methods.

A. Qualitative Methods
These methods rely essentially o n the judgment of experts to translate qualitative informat ion
into quantitative estimate. The important qualitative methods are:
· Jury of executive opinion method: very popular in practice, this method calls for the
pooling of views of a group of execut ive on expected future sales and co mbining the m
into sales estimates.
· Delphi method: this method involves converting the views o f a group of experts, who
do not interact face to face into a forecast through an iterative process.

B. Quantitative Methods
This method broadly comprises of two techniques of forecasting demand: these are time series
projection and causal methods.

· Time series projection methods: this method generates forecasts on the basis o f a n
analysis of the historical time series. The important time series pro ject ion methods are
as follows:
 Trend projection method: very popular in practice, this method involves in
extrapolating the past trend on to the future.
Harambee College CD E Page 47
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

 Exponential smoothing method: in exponential smoothing, forecasts are

modified in the light of observed phenomena.
 Moving average method: according to this method, the forecast for next period
represents a simple arit hmetic, average or a weighted arithmetic average o f the
last few observation.

· Causal methods: more analyt ical than the preceding method, causal method seeks to
develop forecast on the basis of cause-effect relationships specified in an explicit,
quantitative manner. The causal method comprises of:
 Chain ratio method: a simple analytical approach, this methods calls for
applying a series of factors for developing a demand forecast.
 Consumption level method: useful for a product that is directly consumed, this
method estimate consumption level on the basis of elasticit y coefficient, the
important ones being the income elasticity of demand and the price elast icit y
of demand.
 End use method: suitable for intermediate products, the end use method
develops demand forecasts on the basis of the consumption coefficient of the
product for the various uses.
 Leading indicator method: according to this method, observed changes in
leading indicators are used to predict the change in lagging variables.
 Economic methods: perhaps the most sophisticated forecast ing tool, the
econometric method involves estimating quantitative relationship derived from
economic theory.
Harambee College CD E Page 48
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2 . 7 S u m m a ry

Given the importance of market and demand analysis, it should be carried out in an orderly
and systematic manner. The key step in such analysis are: (i) situat ional analysis and
specification of objectives, (ii) collect ion of secondary information, (iii) conduct of market
study, (iv) characterization of the market, and (v) demand forecasting.

For the purposes of market study, information may be obtained fro m secondar y and primar y
sources. Secondary information is information that has been gathered in some other context
and is already available. While secondary information is available econo mically, its
reliabilit y, accuracy, and relevance for the purpose under considerat ion must be carefully
examined. And if it is not comprehensive in scope it needs to be supplemented with primar y
information gathered through a market survey.

Based on the information gathered from secondary sources and through the market survey, the
market for the product may be described in terms of the fo llowing; effective demand in the
past and present, breakdown o f demand, price, methods of distribution and sale promotion,
consumers, supply and competition, and government policy.

After gathering information about the various aspects of the market and demand from primar y
and secondary sources an attempt may be made to estimate future demand.

2.8 Answer to Chec k Your Pr ogress E xercise

1. Refer Sections above each progress questions.

Harambee College CD E Page 49
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Model E xa mination Questi on

1. What are the various steps or elements in market and demand analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

2. What are the basic objectives for undertaking market and demand analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. Discuss the steps taken to conduct sample survey and factors, which affects the results o f
the market survey.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. What are the different factors, which affects market and demand analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
5. Why are demand forecasting become necessary?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
6. Discuss the two methods of forecasting demand how it could be applied?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 50
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

3. Technical Analysis

Analysis of technical and engineering aspect is done continually when a project is being
examined and formulated. Other t ypes of analysis are dependent and closely intertwined wit h
technical analysis. Technical analysis is concerned primarily with material inputs and utilities,
manufacturing process/technology, product mix, plan capacit y, locat ion and site, machineries
and equipments, structures and civil works, project charts and layouts and work schedule.
This unit discusses these aspects of a project and emphasize the need to examine alternative.

3.1. Material Inputs and Utilities

An important aspect of technical analysis is concerned with defining the materials and utilities
required, specifying their properties in so me detail and setting up their supply programme.
Material inputs and utilities may be classified into four broad categories:
1. Raw Materials,
2. Processed Industrial Materials and Components,
3. Auxiliary Materials and Factory Supplies and
4. Utilities.

3.2. Manufacturing Process/Technology

It is to be ensured that the manufacturing process to be adopted is modern and at the same
time appropriate to the level of economic development of the country. Where sophisticated or
new process is to be adopted, the advice o f a committee of technical experts is also sought
before the project is cleared.

Normally the choice of technology is influenced by a variety of consideration:

 Plant capacity: there is a close relationship between plant capacit y and production
technology. To meet a given capacit y requirement perhaps only a certain production
technology may be viable.
 Principal Inputs: the choice of technology depends on the principal inputs available
for the project. In some cases, the raw materials available influence the technology
chosen.
Harambee College CD E Page 51
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

 Investment outlay and production cost: the effect of alternative technologies o n

investment outlay and production cost over a period of time should be carefully
assessed.
 Use by other units: the techno logy adopted must be proven by successful use by
other units.
 Latest development: the technology adopted must based on the latest development in
order to ensure that the likelihood of techno logical obsolescence in the near future, at
least, is minimized.
 Ease of absorption: the case wit h which a particular technology can be absorbed can
influence. The choice of technology, so metimes a high level techno logy may be
beyond the adoptive capacity of a developing country which may trained personnel to
handle the technology.

Another issues related with technology is: acquiring techno logy, and appropriateness of
technology.

Acquiri ng Technol ogy

The company can acquire technology by way of
A. Technology licensing
B. Outright purchases
C. Joint ventures arrangement

Appropriate ness of Tec hnol ogy

Appropriate techno logy refers to those methods of production which are suitable to local
economic, social and cultural conditions. These who basically advocate the appropriateness o f
technology urge that the technology should be evaluated in terms of the following questions:

Whether the technology utilizes local raw materials?

Whether the technology utilizes local manpower?
Whether the goods and services produced cater to the basic needs?
Whether the technology protect the ecological balance?
Whether the technology is harmonious with social and cultural conditions?
Harambee College CD E Page 52
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Check Your Progress Exercise

1. Discuss all considerations in material input and technology analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ .
2. Discuss appropriateness in technology analysis by giving practical example?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ .

3.3. Product Mix

The choice of product mix is guided by market requirements. In the production of most of the
items, variation in size and qualit y are aimed at satisfying a broad range o f customers. For
example, a garment manufacturer may have a wide range of cho ices in terms o f size and
qualit y to cater to different customers. It may be noted that the variation in qualit y can enable
a company to expand its market and enjo y higher profitabilit y. Hence, product mix as a n
element of technical analysis has to be done well in light of the needs and wants of customers.

3.4. Plant Capacity

Plant capacity (also referred to as production capacity) refers to the volume or number of units
that can be manufactured during a given period.

Plant capacity may be defined in two ways: Feasible Normal Capacit y and No minal
Maximum Capacity.

The Feasible Normal Capacity refers to the capacit y attainable under normal working
conditions. This may be established on the basis of the installed capacit y, technical conditio n
of the plant, normal stoppages, down time for maintenance and fool changes, holidays, and
shift patterns.

The Nominal Maximum Capacity is the capacit y which is technically attainable and this o ften
corresponds to the installed capacity guaranteed by the supplier of the plant.
Several factors have a bearing on the time capacity decision. These are:

Page 53
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

a. Technological requirements: for many industrial projects, particularly in process

type industries, there is a certain minimum economic size determined by the
technological factor. For example, a cement plant should have be expected to produce
a capacit y o f at least 300 tones per day, otherwise it may not be cost effective and the
like.
b. Input constraints: in a developing country like Ethiopia, there may be constraints on
the availabilit y of certain inputs. Power supply may be limited, basic raw materials
may be scarce, foreign exchange available for import may be inadequate. Constraints
of these kinds should be borne in mind while choosing the plant capacity.
c. Market conditions: the anticipated market for the product have an important bearing
on plant capacity. If the market for the product is likely to be ver y strong, a plant of
higher capacit y is preferable. If the market is likely to be uncertain, it might be
advantageous to start with a smaller capacity. If the market, starting from a small base,
is expected to grow rapidly, the initial capacit y may be higher than the init ial level o f
demand further addition to capacity may be effected with the growth of market.
d. Resource of the firm: the resource, both managerial and financial, available to a fir m
define a limit on its capacity decision, obviously, a firm cannot choose a scale o f
operations beyond its financial resources and managerial capacity.
e. Government policy: the capacity level may be influenced by government policy.

Check Your Progress Exercise

1. Discuss all considerations in product mix and plant capacity analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ _ .

3.5. Locations and site

The choices o f location and site fo llows an assessment of demand, size, and input
requirement. Though often used synonymously, the term „lo cat ion‟ and „site‟ should be
distinguished. Location refers to a fairly broad area like a cit y, an industrial zone, or a coastal
area; while site refers to a specific pieces of land where the project would be set up.
Harambee College CD E Page 54
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

The choices of location are influenced by a variet y of considerations: proximit y to raw

materials and market, availability of infrastructure, government policy and other factor.

Site Selection
Once the broad location is chosen, attentions need to be focused on the selection o f a specific
site. Two to three alternative site must be considered and evaluated with respect to cost of
land and cost of site preparation and development.
The cost of land tends to differ from one site to another in the same broad location. Sites close
to a city cost more whereas sites away from cities costs less.

The cost of site preparation and development depends on the physical featre of the site, the
need to demolish and relocate existing structures, and the work invo lved in obtaining ut ilit y
connections to the site.

3.6. Machineries and Equipments

The requirements of machineries and equipments is dependent on production techno logy and
plant capacity. It is also influenced by a t ype o f project. For a process oriented industry, like a
petrochemical unit, machineries and equipment required should be such that the various
stages and matched well. The choice of machineries and equipment for a manufacturing
industry is somewhat wider as various machine can perform the same function with var ying
degree of accuracy. The equipment required for the project may include
- Plant (process) equipment - Instruments
- Mechanical equipment - Controls
- Electrical equipment - Internal transportation system
- Others
Check Your Progress Exercise
2. Discuss all considerations in machineries and equipment analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ __ .
Harambee College CD E Page 55
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

3.7. Structure and Civil Works

Structures and civil works may be divided into three categories
- Site development and preparation
- Building and structure
- Outdoor works
Check Your Progress Exercise
3. Discuss all considerations in structure and civil work analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ .

3.8. Summary
Technical analysis is done continually when a project is formulated and examined. The
technical feasibilit y o f the project is undertaken to make sure the appropriateness o f
technology, material inputs, plant capacity, location, site etc.

In the technical analysis part it has to be ensured that the manufacturing process to be adopted
is modern and appropriate to the level o f econo mic development of the country. And also the
analyst should have to consider the various factor which influences the choice of technology.

Plant (production) capacit y, as a basic element of technical analysis, refers and market,
availability of infrastructure government policies and other factors have to be taken into
consideration.

The machineries and equipment being selected for a project greatly depend on production
technology of plant capacity.

Technical analysis part also comprises of structure and civil work, which incorporates site
development and preparation, building and structure, and outdoor works.

3.9. Answer to Check Your Progress Exercise

1. Refer Sections above each progress questions

Harambee College CD E Page 56
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

MODEL EXAMINATION QUESTIONS

1. What are the different elements of technical analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ _
2. What is the different factor that influences the cho ice o f techno logy? And the various
ways by which companies acquire technologies?

In selecting appropriate technology, the technology should be evaluated in terms o f quest ions
like?

What is the difference between Feasible Normal Capacity and Nominal Maximum Capacity?

Write these factors which influences capacity decisions?

Does there exists difference between location and site? It so, what is the difference?

What are the factors that affect the choice of location?

Site and development covers various area like what?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 57
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4. Manageme nt & Organization analysis and Appraisal

Management is one o f the most vital input for the success of a business enterprise. It is the
backbone of a project from appraisal stage to successful implementation and future growth. It
is the quality o f management that makes all t he difference between success and failure o f a
project. Though management is the most important factor, yet it is the most difficult to assess
and evaluate because it is abstract, intangible and non quantifiable.

Assessment of management is more an art than a science. In management appraisal we are

concerned with integrity, caliber, resourcefulness, and qualit y o f management. The aim is to
identify management gap and inadequacies and supplement them wherever necessary having
regard to the background, experience and managerial capabilit y to the entrepreneurs. There
are not set rules or procedures as to how the background of a promoter is to be investigated.

Besides making references to his bankers, mo st of the t ime the officers of financia l
institutions call on promoters and other persons connected with industry and trade to get first
hand information on the antecedents of a pro moter. But, by and large a view on promoter‟s
ability is formed during detailed discussion with the promoter‟s in the course of appraisal.

Before we proceed to discuss on how to evaluate the management elements of organization let
first look at on the need for having project types of organization.

4. 1 . Project Orga nizati on

The attainment of goals involves effective organization of task than lead towards these ends.
There are various forms o f organizat ion. A t ype of organizat ion, which is efficient or
appropriate for one task may not be suitable for other. Project in particular require particular
attention in terms of organization, since they involve scarce resources.

Project type object ives cannot always be achieved within regular organizational structure.
Some job requires particular attention, scarce resources, limited time, special skills etc.
Harambee College CD E Page 58
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Routine and repetitive jobs are often carried out within the regular line organizat ion, hence
they do not need to be organized as projects. The project approach (project type of
organization) is required when the task:
- is complicated and light must be shed from several direction
- is entirely new and there is uncertainty about how to handle it
- involves several organization or units and demands cooperation
- is cost intensive and requires special follow up
- is to be carried out within a definite period of time
- is limited and specified; and
- demands broad and active participation.

4. 2 . Project, as Special Orga nizati on

Projects are instruments of change. The need for change may come for various reasons suc h
as:
- a solution to a particular problem
- taking advantage of a new situation or opportunities
- the need to address a crisis etc

In order to introduce change and attain the desired goal, the project needs to be organized in a
particular way that can facilitate an effective and efficient way o f carrying out planned
activities and discharge set duties and responsibilities.

Since jobs that require the project approach are unique, they also demand special types o f
organizations. Change could be accomplished through the project approach by using
temporary organization with simple and quicker decisio n making process and flexibilit y in
planning, monitoring and executing the project activit ies. These are opportunities that are not
normally available in regular line organization, as these generally tend to be more
bureaucratic.
Harambee College CD E Page 59
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Adva ntage of Te mpor ary Project type Organi zati on

The operational modalities of temporary organizations provides the following opportunities.
· Planning and structuring the work in a manner that flexibly responds to new
conditions and needs.
· Pooling together skills and experiences from different organizations units, etc.
· Establishing line of communication and work approaches tailored to the problem.
· Close follow-up o f task and review of expected results at appropriate t ime or phase
and getting timely decisions.
· Encouraging collaborative effort to accommodate change as easily as possible.

Although the project (temporary organization) approach has a number of advantages, it cannot
guarantee success and the attainment of set object ives unless the appropriate and most
efficient type of organization is put in place to execute the project.

4. 3 . Alternative Appr oac hes to Pr oject Organi zation

Forms of Pr oject Organizati on

There are different forms o f pro ject organizat ion. Each form of project organization has its
own merits and drawbacks. Although there are several forms o f project organizat ion, here we
shall consider only the basic types.

Functional Orga nizati on

The functional forms of organization is one of the commo nest types o f vert ical organizations.
In this system of organization each branch reports a person specially qualified for a particular
function. According to the funct ional forms of organizat ion peoples are grouped on the basis
of similarit ies in skills, act ivities, expertise, experiences etc. Employees working in the
various departments of the organizations are assigned wit h parts of the project activit ies that
relates to their depart ments‟ work. In this t ype of project organization the responsibilit y o f
coordinating the project activities usually rests on the shoulder of the general manager.
Harambee College CD E Page 60
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Functional Type of Organization

Top management

production marketing maintenance finance

workers

Merits of Functi onal Organi zati on

The merits of functional organization include the following:
· increased work satisfaction for specialist
· easily understood by most employees
· well-established vertical communication channel
· intensive utilization of specialist
· mass production through standardization and specialization scheme
· minimized duplication of effort and resources
· continued knowledge and experience building in a particular field of specialization
· logical and consistent with the natural division of tasks
· provides better security and confront for employees
Harambee College CD E Page 61
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Limitati ons of Functi onal Orga nizati on

Functional organization has the following limitations
· it doesn‟t give the necessary emphasis to organizational objectives
· conflict could arise among functional departments in favor of their specialized
interests and autonomy
· immediate actions are hampered by divided control and competition
· as it is more function focused, it may not give adequate project oriented emphasis
needed to accomplish project tasks
· flexibility and responsiveness to quickly changing requirements is limited
· opportunities for training all round executive is reduced
· employees motivation will be impacted, as they will be overloaded with addit io nal
project task, (especially when the project duration is prolonged).

Pure, Pr oject Orga nization

The pure project approach is a form of organization where a separate, temporary and specia l
purpose organization is established for the purpose of achieving specific pro ject tasks. In such
a situat ion a group of people having the required skills are organized into an autonomous set-
up with its own leadership, structure and resources.
Harambee College CD E Page 62
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Pure Pr oject Orga nizati on

Top management

project manager project manager project manager

A B c

PROJECT & LIVESTOCK

ENGINEERING SOIL & WATER

PURCHASING TRAINING & TECHNICAL

CONSTRUCTION ADMINISTRATION AND

Like other forms of organizations, the projectized organization has its own advantage and
limitations.

Adva ntage or Pr oject Organizati on

Pure project organization has a number of benefits:
· it gives the project manager complete line of authority over the project
· the project staff works directly for the project manager
Harambee College CD E Page 63
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

· the prime objective of the project staff is the attainment of the pro ject objectives and
thus are better customers focused
· the communication channels are strong
· the reaction item is rapid
· conflict over resources are minimized as the project manager is in control o f available
resources
· better evaluation o f the performance of each project staff in terms of contribution to
the achievement of the project activities and reward on the basis o f such a
performance is possible
· the project staff will have a better chance of working in teams.

Disadva ntages of Project Orga nization

The project organization also has its own limitations.
· if there are various projects under the same organization, the cost could be high due to
duplication of efforts
· as this forms of organizat ion pulls many resources it upsets the smooth operation of
the patent organization
· since there would be no reservo ir o f specialists, there might be a tendency to retain
experts on the project longer than required
· as there would be no functional group to look forward to future work, establishing new
projects becomes difficult for the organization
· the project staff will suffer from problems of job insecurity threats.

The Matrix Organization

The matrix organization or sometimes also known as Grid Structure is a mosaic (intersection)
of task (project) and function (continuous work) of an organizat ion. It is a mix of a temporary
but ver y important job that needs the quick pooling together of skills and support that are
required from functional departments.

In a situation where a regular organization wit h funct ional departments cannot execute the
kind of work that project can accomplish with the desired level of effectiveness and efficiency
Harambee College CD E Page 64
 P r o j e c t p l a nn i n g , A n a l y s i s a n d M an a g e m e n t
N o v . 2 01 4

and where at the same time projects alone may not be able to have the kind of functional
support they required from other departments of an organizat ion, an inno vat ive kind o f
structure known as the matrix organizat ion is required. The matrix organization is therefore a
network of intersections between the pro ject team and the regular functional departments or
units or elements of the same organizat ion. There are various forms of matrix organization
one example is shown in the diagram below.

Top management

Planning administration & agro forestry livestock dev’t

department finance department department

project a

X X X

project b

X X X

project C
X X X

In the above diagram each o f the above pro ject (A, B & C) have their own entit y while at the
same time they obtain support from the four functional departments of the same organization.

Adva ntage of Matri x Orga niza tion

The matrix organization
· produces economy of efforts and expenses
· enable the project manager to draw specialist support of the functional services
Harambee College CD E Page 65
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

· make the project manager accountable for the success of the pro ject and at the same
time to have full control over the project resources
· increases the emphasis given to project objectives thereby increasing project visibility
· it is easy to close down projects once the task is completed
· allow speedy and flexible organization of projects and making of decisions.

Disadva ntage of Matri x Organi zati on

The matrix organization has its own limitations:
· undesired conflicts between functional departments, and project managers may occur
over limited resources
· duplication of efforts may arise between different projects
· a matrix organization could be complex and costly
· it creates ambiguous situations for both employees and managers alike, as emplo yees
are required to respond to the demands/ orders of two or more bosses
· it splits the authority of projects managers and thus making the management of
projects difficult and complex.

There is no one best way of organizat ion, which is best for all projects. We may find one o f
the above discussed organizat ion t ypes or a mix of these organizat ion form. We may find all
organization types wit hin one palent organizat ions on the different projects of the same
organizat ion, or we may even find the three different forms o f organizat ion on one project at
different level of the project. There could even be instances where a single form o f pro ject
organization may not be best throughout the lifecycle of one project.

After we discussed on the different alternative approach to project organizat ion let‟s see wit h
the appraisal o f management. Management appraisal involves the assessment of the
entrepreneur, the board of directors, the chief executive and the departmental heads.
Harambee College CD E Page 66
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Check Your Progress Exercise

1. What are different approaches to project organization? Which one is the most
advantegious?

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ .

4. 4 . The Entrepreneur

While evaluating management, a clear dist inction is to be drawn between an entrepreneur and
a manager. The former is builder of an enterprise and an opportunit y explo iter while the latter
is an organizat ion developer and problem so lver. The characteristics o f an entrepreneur are a
high-need for achievement, risk taking behavior, desire to change, abilit y to ident ify an
opportunity etc.

4. 5 . Board of Direct ors/ Manage ment Set UP

The company‟s board should be independent, well-balanced and not dominated by an y

particular group and should include persons experienced in the particular line o f industry. It
should be compact and not unwieldy. It is not enough to have eminent men on the board but
persons who would devote time to the working of the company. If the board is not properly
constituted, the financial institutions st ipulate that the company shall broad-base the board of
directors to the satisfaction of the institutions.

The board of directors has a ver y important role to play but it has its limitat ions. Hence the
importance of selection of proper chief executive.

4. 6 . Chief E xecutive

He is the nerve center of the unit and he ultimat ely determines the success or failure o f the
unit. the caliber of chief executive is ver y important. Besides background, experience and
qualifications of chief executives, his st yle of management and whether he needs to
professional advice and delegates authority or whether he has a tendency to concentrate
Harambee College CD E Page 67
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

everything to himself are looked into. The term of appointment of the Managing Director/
full-time Director are closely scrutinized and got revised where considered necessar y. It is
important that the assisted companies acquire professio nal management and there is
continuity in top management. It is, therefore, stipulated that the appoint ment, re-appoint ment
and any change in the office of whole-time directors would be subject to the approval of the
financial institutions. The financial inst itutions also reserve the right to appoint a nominee on
the Board of the company and this right is exercised when need is felt to keep a close watch
on the affairs of the company.

4. 7 . Departmental Heads

Suitably qualified and experienced persons should be appointed as departmental heads. The
timings of appoint ment of various executives should synchronize wit h the need of the unit.
appointment of relatives of chief executive on high salaries be avoided.

The organizational chart should be examined to see that the company develops proper
organizational structure to meet the requirement of the unit during implementation and
production stages and there is proper delegation of authority.

Check Your Progress Exercise

1) What are main considerations and issues in organizat ion and management analysis?

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ .
2) What type of management structure is appropriate for project management?

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ .
Harambee College CD E Page 68
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4. 8 . Summary

Management is one of the most vital input for the success o f a business enterprise. assessment
of management is more an art than a science. Because the management appraisal concerned
with integrit y, Caliber, resourcefulness and qualit y o f management which is actually difficult
to measure/evaluate.

Project in particular require part icular attention in terms of organizat ion, since they invo lve
scarce resources. Project type object ives cannot always be achieved within regular
organizational structure. Rather it require special types of organizational structure.

There are a number of different forms of project organization to ment ion few: functiona l
organization, pure project organization, the matrix organization. Each forms of project
organization has its own merit and demerits.

Management appraisal involves the assessment of the entrepreneur, the board of directors, the
chief executives and the department heads. Since the success of the project greatly depends on
the quality of manpower, the educational qualification, experience commitment,
resourcefulness etc of members of the project needs to be checked appropriately.

4. 9 . Answer t o Chec k Your Pr ogress E xercise

1. Refer Sections above each progress questions

Harambee College CD E Page 69
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4. 1 0. M O DE L E XAM I NAT I O N Q UE S T I O N S
1. Why is important to undertake management appraisal?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
2. When does the project type of organization is required?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. What are the merit and demerit for a functional type of organization?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. What are the merit and demerit for pure project type of organization?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
5. What are the merit and demerit for matrix type of organization?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
6. How could we evaluate management part of the organization like Entrepreneur, Board of
Directors, Chief Executive Officer, Department Head?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 70
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5. Financial Analysis

Financial analysis is analytical work required to identify the critical variables which are useful
for likely to determine the success or failure of an investment. Its concern is to determine,
analyze and interpret all the financial consequences o f an invest ment that might be relevant to
and significant for the invest ment and financing decisio ns. This unit discusses the viabilit y o f
projects from financial significance to stakeholders and to the economy in general. For this
purpose different statements such as resource flow and financial statements how then are and
financial analysis tools (NPV, IRR and payback period) are discussed in detail.

5.1. Purpose of Financial Analysis in Project Planning

Investors transfer the liquid financial resources (his own personal selling or borrowed money)
into production assets with the objective of producing and obtaining future benefit s. This
process is known as investment, along term commitment of scarce resources.

The long-term commitment by the investor needs the transformation o f liquid financial
resources (own or borrowed) into productive assets for financing an invest ment project.
Project financing includes the design of proper financial structure, considering the adequac y
of the financial plan, and the optimization of project financing fro m the different actors or
beneficiaries point of view. Therefore, the scope and objective o f financial analysis are to
determine, analyze and interpret all the financial consequences o f an invest ment that might be
relevant for and significant for the investment and financing decisions.

Financial analysis is essentially undertaken for the following purposes:

1. It provides an adequate financing plan for the proposed investment
2. It determines the profitability of a project
3. It assists in planning the operation and control of the project by providing management
information to both internal and external users
4. It advises on methods of improving the financial viability of a project entity
5. It illustrates the financial structure of the project and its existing and potential financial
viability.
Harambee College CD E Page 71
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Therefore, the purpose of financial analysis is not just to document the expected impact of the
project, liquidit y, credit worthiness, financial efficiency, etc, of the various agents invo lved; it
should also be part of the process of project design itself.

5.2. Methods of Financial Analysis

To assess financial viabilit y of a project a range o f tools and methods can be used and various
types of financial statements can be prepared. This includes ;resource flow statements, profit
and loss statements, cash flow statements and balance Sheet
These statements are explained in detail below.
Check Your Progress Exercise
1. What is the purpose of financial analysis appraisal?

__ _ _ _ _ _ _ _
2. What are techniques of financial analysis of project appraisal?

__ _ _ _ _ _ _ _

i. Resour ce Flow Stateme nts

The starting point of the financial analysis of a project is drawing up of a statement of project
cost and benefits. The benefit and cost items included in the statement should include only
those items, which are incremental. The resource flow statement shows: (1) the list of
resources used in the project and (2) the resources generated by the investment on the project.

The major elements of resource flow statements are:

1. Investment costs: invest ment costs cover capital expenditure items such as land,
buildings, equipment and furniture etc. It includes three group of costs:
(a) Initial fixed investment costs.
(b) Pre-production capital expenditure.
(c) Working capital.
Harambee College CD E Page 72
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Generally speaking, the amount of funds required for operating needs varies from time to time
in every business. But a certain amount of assets in the form of working capital are always
required; if the business has to carry out its funct ions efficient ly and wit hout a break. The two
types of requirements are permanent (fixed) and variable.

2. Operating Costs/Production Costs. Operating costs can be divided into two: Fixed
and Variable components. The total operating costs will then be the sum o f the fixed and
variable costs and will increase over the operating years unt il full ut ilizat ion of the
investment asset is reached. It includ es costs like; Cost of Production, Administrative
Expenses, Sellin g Expenses, Depreciation, and Production Build Up

3. Benefits
Benefits of a project can be several. For example, a range of different farm products in an
agricultural project, or cost savings as well as production benefit fro m a transport
infrastructure project. The different benefits will all be variable wit h respect to their
associated costs, and hence, total benefits will also be variable.

Benefits can be direct (production output) which may include items like:
- main product
- by product
- residual and other income

Benefits can also be indirect or external. For example, in a road projects reducing
transportation costs, reducing operating costs for maintenance of vehicles and saving time o f
the society are indirect benefits of the project.

Benefits are associated with the capacit y ut ilization factor to which operating costs were also
related. When the value and timing o f invest ment costs of and operating costs have been
determined the net benefits of the pro ject can be calculated. The net benefit is computed by
simply subtracting the investment, operating and working capital costs from benefits.

The following table depicts the complete project resource statement, which brings together the
investment costs, operating costs, working capital and project benefits.
Harambee College CD E Page 73
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

The net benefits are negative in the first years whiles invest ment is taking place, and become
positive when the utilization of the new assets is building up.

ii. Project Fina ncial State me nts

Financial analysis also involves formulation of various financial statements, which enable
project owners and other interested stakeholders to know whether the projects worthy or not.
Most commonly prepared financial statements are balance sheet, loss and pro fit statement,
and cash flow statements.

a) Profit and Loss Statements

The main purpose of profit and loss or trading profit and lo ss account in short income
statement is to calculate the profit or loss of enterprise or project. It is the measure of the
profitability of the project.

The format of the profit and loss account varies according to who is preparing it and for what
purpose, and on the type of activit y, be it manufacturing, retail or service projects. Gross
profit is calculated by deducting direct production costs (cost of sales) from sales revenue. Net
profit item is calculated by deduct ing other operation costs, such as over head costs including
depreciation, loan interest and corporate tax from gross profit. The last part of P/L account is
the appropriation account, which shows how much o f the net profit is retained to be
reinvested in the project and how much is distributed to stockholders.

b) Balance Sheet
Balance sheet is a statement of the assets and liabilities of the enterprise and gives "the net
worth" an enterprise at a point of time. It is prepared to present a picture of the firm on one
day in the year. The information represents the account balances recorded and does not
indicate exact economic values.

The balance sheet shows the way in which a project is financed, whether by sponsors, lenders
or creditors and how these funds have be emplo yed. The sources of funds, even where the y
represent the capital invested by shareholders are regarded as the liabilit ies o f the co mpany
and the use to which funds have been put are the assets.

The Balance Sheet is the key to understanding the financial posit ion of a project or enterprise
shows how well a project has performed over a period of t ime, the balance sheet is a measure
of what the project is worth at a particular point in time..

Balance sheets are presented in a number of different formats. An example of a typical

vertical format is shown below.
Harambee College CD E Page 74
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

c) Cash flow statement

Finance is considered by many as the lifeblood of an organizat ion or any pro ject. A well
designed project may fail due to insufficient cash for its day to day operation. Therefore, a
project planner has to develop so me techniques of forecasting cash in flows and out flows.
Cash flow statement is a basis for showing the cash flows associated with operating resources,
funding and investment.

Cash flow statements are prepared for two reasons:

First, it is prepared for financial planning purpose: in this case, the purpose is to know the
liquidity position of the project. Secondly, cash flow statement may be prepared for the
purpose of Net Present Value (NPV) and Internal Rate of Return (IRR) calculat ion. The
purpose here is to measure the overall profitability of the project.

In general, cash flow statement is the main tool of financial planning and is so metimes
referred to as the "Source and application of funds statement".

Present value is the net cash flo w o f the pro ject over its life subject to discounting. If you are
given the discounting rate say 10%, you can calculate discount ing factors and then the present
value of the net cash flow o f the project. Example: if the Net cash flow o f the pro ject is in it s
first year of operation is Br. 100,000 and discounting rate is 10%, the present value o f this
sum of money (at Zero period) is given by the formula:

Where:
PV = A (1 + r)-n
A = Amount
PV = 100,000 (1 + 0.1)-1
= 100,000 (1.1)-1 or r = discounting rate

= 100,000 PV = present value

1.1 n = number of periods for which the

= 90909.09Br amount of money is discounted
-n
(1 + r) = is the discounting factor.

The value of the discounting factor (1+i)-n can be determined eit her using a calculator or a
financial table prepared for this purpose.

The cumulative cash flow must always show a positive balance. Because, a negative amount
indicates that the project has run out of cash. Cash flow statement records (cash in flow and
out flow) are presented on the cash basis o f accounting not on the accruals concept, hence it
does not give an indication o f profitabilit y. It simply tells you the amount of cash available at
any o ne po int in t ime and whether it is sufficient to be able to meet co mmit ments as they fa ll
due. It is possible for a project to be profitable yet find itself short of cash when it is needed to
Harambee College CD E Page 75
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

meet different types of operational commit ments such as interest and loan repayments. This
may be because sales revenue has not been collected.

As it is shown in the above schedule, CFS can be prepared for IRR and NPV calculat ion
purpose to see whether the project is profitable or not. If a project has a negative cash flow but
is acceptable in terms of its IRR and NPV and profitable in terms of the net profit figures then
there are a number of options the project analyst can consider to improve the liquidity position
of the project.

d) Supporting statements/schedules
To prepare the three main financial statements the following supporting schedules and
additional information are required:
1. Depreciation schedule:
2. Taxation
3. Loan repayment schedule:
Check Your Progress Exercise
3. What are financial statements used for of project appraisal?

__ _ _ _ _ _ _ _

5.3. Measures of Project Worth

Measures o f pro ject worth are measures that tell you whether a pro ject is worth undertaking
form a part icular viewpoint. All such measures are concerned wit h the question "are the
benefits greater than the costs?" There are different ways o f measuring pro ject worth, which
may fall under two categories, that is discount ing cash flow methods and non discounted
(traditional) methods. They are briefly explained here in after.

5.3.1. Non-Disc ounte d Measure of Pr oject Worth

A) Payback period
Payback period is one o f the simplest method to find out the period by which the investment
on the project may be recovered from the net cash inflows, i.e., gross cash in flow less the
cash outflows. In short it is defined as the period required to recover the original invest ment
cost. Payback period starts with a preconceived notion that the management wants to recover
the cost of invest ment within a "specific period". The basic drawbacks o f this method of
financial analysis are:
Harambee College CD E Page 76
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2) The payback period is a very crude measure of project worth because it completely
ignores benefits/ cash flows after the period when the init ial invest ment has been
repaid.
3) It ignores the time value of money
4) It is unsuitable while comparing the payback periods of two or more projects where
the net cash inflows are of widely different amounts for different projects.
5) It requires an estimation of a safe period, in realit y, that varies between t ypes o f
industry.

There are two methods in use to calculate the payback period.

· Unequal cash flows: In this situation the pay back period id calculated as:
Payback period = E + B/C
Where
E = number of years immediately preceding
the year of final recovery
B = the balance amount to be recovered
C = cash flow during the final recovery

Example: A co mpany is considering to invest on a particular project. The alternative projects

available are: Project A that costs Br. 100,000, and Project B that Costs Br. 70,000. The net
cash in flows estimates are as follows:

Net Cash Inflow

Y e ar Project A Project B
1 30,000 7,000
2 30,000 15,000
3 35,000 20,000
4 35,000 56,000
5 40,000 45,000
Which project is good?
Harambee College CD E Page 77
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Solution:
Project A Project B
Ye a r Net cash inflow Accumulated Net cash inflow Accumulated
Net cash inflow Net cash inflow
1 30,000 30,000 7,000 7,000
2 30,000 60,000 15,000 22,000
3 35,000 95,000 20,000 42,000
4 35,000 130,000 56,000 98,000
5 40,000 170,000 45,000 143,000

Payback period for Project A:

Payback = 3 years + 5000*
period 35,000

= 3.14 year or 3 years and 2 months

Payback period for Project B

PP = 3 years + 28,000
56,000

= 3.5 year or 3 years and 6 months

Note: * represent the balance to be recovered from the cash inflow in period four; i.e.,
100,000 – 95,000 = 5,000

Uniform Cash flows

Where the annual cash flows are uniform, payback period can be calculated using the
formula:
PP = Original Investment
Annual Cash Flows

Example: A project requires an investment of Br. 200,000. It is expected to generate an

annual cash flow o f Br. 50,000 per year over the life o f the project. How long will it take to
recover the investment?
Harambee College CD E Page 78
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

PP = Original Investment
Annual Cash Flows

= 200,000 Br
50,000

= 4 Years

B) Simple Rate of Return (SRR)

SRR is defined as the ratio of net profit in a normal year of full operation or production to the
original investment outlay in the pro ject. This measure is so met imes known as the return on
equity capital (ROE) and is defined as a percentage for year by:

ROEt = MPt x 100

Qt
Where:
ROE = Return on equity capital
MP = Net profit
Q = The value of equity capital

A similar measure can be defined for the total capital (including loan capital) invested in the
project by excluding interest from the net profit and including loan capital in the total capital
invested. This is given by the formula:

Where:
Rt = MPt + It Rt = return on total capital
x 100
I = the interest paid
Kt
K = the value of total capital
invested

C) Benefit cost ratio (B/C)

This is a measure of efficiency and used for co mparison o f different projects. It is given b y
the formula:
Harambee College CD E Page 79
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

B/C = Benefits
Cost of the project

N.B. This approach can also be used to calculate discounted benefits and costs.

In general, non-discounted measures of project worth can be regarded as simplified short cuts
that can be used for rough approximations and decisio n making on small invest ments but they
are not appropriate quick look at on a feasibilit y viabilit y of the project before you go to detail
analysis of the project carried out.
Check Your Progress Exercise
1. Discuss what are non discounting methods of project appraisal?

__ _ _ _ _ _ _ _

5.3.2. Discounte d Measure of Pr oject Wort h

Before we are go ing to discuss discounted financial analysis techniques, let us discuss briefly
the concepts of discounting and compounding.

Money is one o f the basic resources o f an organization that has a t ime value. The time dela y
between an outlay and its effect is the main reason for discount ing and compounding future
benefits and costs.

To allow for the changes in the time value o f mo ney, the terms "present value" and "future
value" are used. To calculate the present value of future costs and benefit s their future values
are "discounted" – reduced from constant price values – back to the present using a discount
rate. The concept of compounding is the opposite of discount ing whereby in co mpounding,
the present value grows to a future value because of the accumulation of interest.
Harambee College CD E Page 80
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Compound Interest
Compound interest can be calculated using the following formula:
Future value = Present value x Compound factor
Where
FV = PV (1 + r)t
r = annual interest rate
t = time in years
Fv = future value
PV = present value

Example: What will be the value o f Br. 100,000 deposit in an account which pays 10%
interest compounded for a period of three years time?

Solution:
PV = Br. 100,000
r = 10%
t = 3 years

FV = 100,000 (1 + 0.1)3
= 100,000 (1.1)3
= 133,100 Br
This is the amount that the account accumulates after three years the difference between the
original sum o f mo ney 100,000 Br. and 133,100 i.e., 33, 100 birr is the interest earned during
the period.

Discounting
The discount rate is the reciprocal o f the co mpound factor and it is given by the fo llowing
formula:

PV = FV or FV (1 + r)-t
(1 + r)t

Example: what will be the present value o f the profit of Br. 100,000 generated in the third
year of a project if the discount rate is 10%?

Page 81
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Solution: Fv = 100,000 Br. r = 10%

t = 3 years Pv = ?

PV = 100,000 (1.1)-3
= Br. 75,000

In a net shell, when you have streams of costs and benefit s (cash inflo ws) for a pro ject, and
you also have a measure of time preference (i.e., rate of discount) we can then discount the
cost and benefit streams to arrive at their discounted value as it is shown above. This
procedure is often described as "Discounted Cash Flows" or DC F.

The commonly used discounting methods are:

- Net Present Value (NPV)
- Internal Rate of Return (IRR) and
- Benefit Cost Ratio (BCR)

These are discussed in brief below.

i) Net Present Value (NPV): is the net sum of total discounted benefits (cash inflo ws) and
total discounted costs. It represents the present worth of an invest ment in excess o f the
investment itself. The NPV method is a system of finding out the excess (or short) of the
present value of the earnings from the investments over and above the present value of the
investment itself.

Steps to find out the NPV

1. Find the project costs
2. Find the future cash flows as estimated for the projected business, net of cash outflows
3. Select an appropriate rate and a period to be considered for such evaluat ion to find the
present value of the future cash flows for the period by discounting by the selected rate
4. Find out the difference between the present value of cash inflows (net) and the
investment cost (present value of invest ments over the life o f the project).This
difference represents NPV.
Harambee College CD E Page 82
 P r o j e c t p l a n n i ng , A n a l y s i s Nov.20 14
and M anageme nt

This calculation can be represented algebraically as:

CFt Where:
å (1+ r) t
NPV = - C0 CF = Cash inflows at different periods
r = discounting rate
C0 = cash outflow in the beginning
NPV = Net Present Value
t = time period

The decision rule here is to accept a project if the NPV is positive and reject it if it is negative.
A pro ject who NPV approaching zero is a marginal pro ject. The planner has to remodify,
otherwise it will be very risk to take such projects.

Comments on the NPV Method

1. The NPV is easy to understand and calculate from the figures available in the project
schedule.
2. The basic drawbacks in this method are:
· estimation of a discounting rate, which can be very much subjective, or need to
be obtained externally such as National Bank.
· the measure fails to indicate which project uses capital more efficient ly or
which projects are closer to the margin of acceptability.

ii) Internal Rate of Return (IRR): is defined as the discount rate the net present value is
zero. IRR method finds out the rate at which – when applied on future cash inflows – the
present value of such inflows taken together should equal wit h the present value of the
cost of invest ment. It is called "Internal", as it is purely related to the return of the
particular projected investment only. In other words it is the rate at which the project
investment is just recovered. In essence it measures the efficiency of capital. To calculate
IRR we can use interpolation method using the following formula:
Lower Difference
IRR = + b et w e en ´ MPVs at lower discount rate
d i s c o u n tin g
rate (DR) discount Absolute differences of MPVs at two discount rates
rates

Harambee College CDE Page 83

 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

As you can see in the formula, you need to have two net present values i.e., posit ive and
negat ive NPVs that can be determined by the trial and error method. The higher the discount
rate is the lower NPV and the lower the discount rate is the higher the NPV. Interpretation
should be attempted arithmetically over a range of discount rates.

Example 1: NPV calculation

AMA company is considering to invest in a particular project. The initial investment cost is
Br. 100,000. It is expected that the project may generate a benefit for 5 years as shown below:

Year Operating cost Annual cash inflow

1 Br. 100,000 --
2 6,000 Br. 20,000
3 10,000 30,000
4 2,000 40,000
5 1,000 35,000

The discounting rate is 10%

Required: Calculate the NPV
The approach is discount ing the cost and revenue streams separately. This is shown as
follows.
Y e ar C os t Revenue Present Value PV of Cost PV of
(Cash in flows) Factor Revenue
0 Br. 100,000 -- 1 Br. 100,000 --
1 6,000 Br. 20,000 0.9091 5,454.6 Br. 18,182
2 10,000 30,000 0.8264 8,264 24,792
3 2,000 40,000 0.7513 3,756.5 30,052
4 1,000 40,000 0.6830 1,366 27,320
5 1,000 35,000 0.6209 620.9 23,905
Br. 124,251
Total Br. 119,462
Harambee College CD E Page 84
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Net present value of the project = PV of Revenue – PV of Costs

= 124,251 – 119,462
= Br. 4,789

Decision: If you are talking about only one project, the decision is to accept this project
since its NPV is positive (Br. 4,789).

A project's NPV varies with the discount rate usually the higher the discount rate then the
smaller the NPV. NPV method is used widely because it provides an absolute measure of the
surplus generated by the project. A project is acceptable at a given discount rate if the NPV
is positive.
Example 2: IRR Calculation
Using the same project data as in t he example 1 above, determine the IRR? New line IRR can
be estimated approximately by interpolation from a few NPV calculations. This interpolation
is done mathematically. The arithmetic rule for interpolation between two discount rates, one
of which gives a positive NPV and the other of which gives a negative NPV, is as follows:
NPVs at lower DR
IRR = Lower rate DR + Difference between ´
DRs Absolute difference of NPUs at two DRs

Where: DR = Discount rate

Using the above data, it was found that the NPV at 10% was Br. 4789. Adopting a second trial
rate of discount 12%, the NPV is found to be (Br. 3201) which is negative.

Y e ar C os t Revenue Present Value PV of Cost PV of

Factor Br. Revenue Br.
0 100,000 -- 1 100,000 --
1 6,000 20,000 0.8929 5,357 18,182
2 10,000 30,000 0.7972 7,972 24,792
3 5,000 40,000 0.7118 3,559 30,052
4 2,000 40,000 0.6355 1,271 27,320
5 1,000 35,000 0.5674 56 7 23,905
Harambee College CD E Page 85
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Br. 115,525
Total Br. 118,726

MPV at a 12% rate in 115,525 – 118,726 = (Br. 3201)

Therefore, IRR lies between 10% and 12% using the above formula, you can calculate IRR o f
the project as follows:
IRR = 10% + (12% - 10%) ´ 4789
4789 –(-3201)
= 10% + 2 4789
7990

= 10% + 2(0.5994)
= 10 + 2(0.5994)
= 11.2%
The IRR of the project is, therefore 11.2%

5.3.4 Fina ncial Rati o A nalysis

If you look at the figures in a Balance sheet or Income statement, it is so met imes difficult to
see their evat significance. A better appreciation may often be gained by a considerat ion of
the relationship between figures, rather than examining their abso lute values. These
relat ionship may be expressed either as a ratio, a percentage or in so me cases, a number o f
days. The use of ratios is mainly co mparat ive. In order to have a meaning a ratio should be
compared eit her with other companies of a similar type, earlier t ime periods of the same
company, or some objective plan or standard set in advance by the firm.

The following section dealt with different types of ratio analysis:

a) Profitability
The relationships of profits made to the sales or assets which have generated them:
(Gross Profit)
i) Gross Profit at % of sales = ´100
Sales
This shows the extent to which the direct costs of sales absorb the sales revenue. The gross
profit is the fund out of which the company must meet its expenses and still leave a balance of
profit.
Harambee College CD E Page 86
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

(Net Profit After Interest + Tax )

ii) Net Profit as % of Sales = ´100
Sales
This shows the extent to which all costs (direct costs + expense) absorb sales revenue and
what net profit remains per $ of sales.
(Net Profit before Interest + Tax )
iii) Return on Assets = ´100
Total Net Assets
This shows how much profit is made for ever y $ of assets which have been used to generate
it. It is a measure of the efficiency with which assets have been used by the company.
iv) Shareholders Return =
(Net Profit (After tax and interest) x 100
Shareholders‟ Equity (Share Capital + Reserves)

This shows how much profit is made for the shareholders for each $ the shareholders have
invested in the project. It shows how successful the investment has been from the
shareholder‟s point of view.

b) Liquidity
By comparing assets and liabilities we try to see if the co mpany is in the posit ion to pay its
debts.
i) Current Ratio = Current Asset
(Working Capital Rat io) (Current Liabilit ies)

Comparison of the total current assets with the total current liabilities will show whether the
company is in a posit ion to settle its liabilities or whether there is so me deficiency o f assets.
As a general rule a current ratio 2:1 is thought to be satisfactory.

Quick Rat io = Current Asset – Stocks

ii) (Acid Test Ratio) Current Liabilit ies

Consideration of the Current Assets as a whole in relation to Current Liabilities is often

considered as dubious, as some of the current assets (particularly stocks) are less
readily realizable than others. The quick ratio compares those assets which are cash, or
readily turned into cash (e.g., debtors) to the Current Liabilities. These are generally
expressed as ratios. It is considered that a 1:1 ratio indicates a satisfactory situation.
Harambee College CD E Page 87
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

d) Cover
Net Profit (before tax and interest
i) Times Interest Earned = Interest Paid
ii) Dividend Cover = Net Profit (After tax and interest
Dividends

This compares the amount of a charge such as interest or dividends wit h the funds out of
which it has to be paid. It is measure of how far profits could fall before the co mpany would
be unable to meet the relevant obligat ion. These are expressed as “times” the relevant factor
(e.g., dividends are covered three times by profit s). The Dividend Cover Ratio is sometimes
expressed as a % of profit paid out as dividend, or payout ratio.

d) Efficiency
The smaller the asset base upon which a given vo lume o f business can be generated, the
greater will be the pro fitabilit y o f the company. This can be measured by the efficiency wit h
which various cases of assets are used.
i) Fixed Asset Turnover = (Sales)
Fixed Assets

The more sales that are achieved fro m the fixed asset base, the greater will be the number o f
times the net profit per birr of sales will be earned in a year and this will give rise to greater
profitability. This is expressed as a turnover ratio, e.g., x times p.a.
(Sales)
ii) Total Net Asset Turnover = Total Net Assets

Has similar significance but considers all assets.

Sales
iii) Stock Turnover Period (in days) = Stocks = Times

The more quickly t he stocks can be so ld, the less the average invest ment will be and the more
efficiently the company will be operating.
(Debtors x 365)
iv) Debtors‟ Turnover Period (in days) = Sales

Page 88
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

v) The more quickly debts can be co llected, the lower the average amount advanced to
customers will be and the more efficiently the company will be operating.

e) Market Ratings
(Net Profit (after tax + interest)
Number of Ordinary Shares
a) Earnings Per Share =

How much profit has been earned for each outstanding Ordinary share?
(Market Price per Share)
b) Price/Earning Ratio = Earning Per Share

This expresses the relat ionship between the earning made in respect of a share and the price
the market demands for it. It is measure of the way the market regards a part icular share. The
higher the opinion o f the market, the greater price will be in respect of a given amount of
earnings and the higher the P/E Ratio will be. The same information is sometimes presented
in a different format as the capitalization ratio:

(Earnings Per Share x 100)

Market Price Per Share

(Dividends per Share x 100)

c) Dividend Yield = Market Price Per Share

This translates the dividends and market price into an effect ive currently yield which the
investor is earning on the share. It does not, however, take account of the capital appreciat ion,
which may be a substantial element of the investors‟ anticipated return.

Limitations of Ratio Analysis

Ratio Analysis is a useful technique for lending meaning to the raw data of financia l
statements. It is used in a comparative sense between other similar enterprises, with different
time periods and to a plan or standard. The simplicity and convenience o f the techniques
should not lead us into thinking that it is wit hout severe shortcomings, which ma y render it s
findings irrelevant. Even where relevant, it does not solve the co mpany‟s problems, it only
indicates areas for further investigation. Ratios have a descriptive rather than a perspect ive
status, and their overall objective is ensuring that the company earns a satisfactory return on
investment and maintains a sound financial basis.

Page 89
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

It should be emphasized that ratios do not provide answers to company problems. Their value
lies more in showing the areas where further invest igat ion may enable remedies to
formulated. Other limitations include:
· Differences between companies will render many co mparison meaningless, as will
changes in the environment and the in-co mpany situat ion and between different time
periods.
· Ratios are suscept ible to “window-dressing” to enable them to seem better than they are,
though it is difficult to do this consistently over a long period of time.
· Changes in the general level o f prices will affect some ratios (but not others) making
comparison of dubious value.
· Differences in the definit ion of assets, profits, etc., in different companies will render
some comparison invalid. Financial data can also be said to be an inco mplete descript ion
of the company‟s situation.
· Ratios t ypically show past data. This may not be an accurate indication of the current
position, still less that of the future.
· There is a danger that the ratio (which is only a control device) becomes subst ituted for
the real objective in the minds of the managers concerned, resulting in a non-optimal
expenditure of managerial effort.

Check Your Progress Exercise

1. Discuss what are discounting methods of project appraisal?

__ _ _ _ _ _ _ _

2. Discuss what the purpose of financial ratio analysis?

__ _ _ _ _ _ _ _
Harambee College CD E Page 90
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.4. Summa ry
Financial analysis is concerned about assessing the viabilit y/feasibilit y o f a pro ject and
identify the financial consequences of an investment. Its specific purposes are:
- to provide adequate financing plan
- to provide the profitability of a project
- to assist controlling the success of the project
- to describe the financial structure of a project and the project's viability.

To see whether these purposes are achieved project planners can use a range of financia l
analysis tools and methods. This includes:
1. Resource flow statements. This statement has the following major elements
a. investment costs
b. operating costs and
c. benefits
2. Profit and loss statements
3. Cash flow statements and
4. Balance sheet

The central purpose of project analysis is as it is said above is to determine whether an

investment outlay can be expected to generate future inco me flow sufficient to cover its
original investment and leave a surplus. There are different ways o f measuring project worth
which may fall under two categories, that is discount ing cash flow methods such as NPV, and
IRR and undiscounted methods (payback period, simple rate of return and cost benefit ratio).

5.5. Answers to Check Your Progress Exercise

1. Refer sections above each check your progress questions
Harambee College CD E Page 91
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.6. Model Examination Questions

3. What are the purposes of financial analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. Outline and discuss the methods of financial analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

5. Identify the major operating cost of a project.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _

6. What are the purposes and/or use of income statement and cash flow statement?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
7. Ident ify the discounted and undiscounted measures project worth. Explain the strength
and weakness of each method.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
8. What is ratio analysis? Explain the different types of ratios.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
9. Based on the following project revenue and cost information, calculate:
A. The NPV
B. The IRR
Harambee College CD E Page 92
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Ye a r Cost Estimated Return

0 Br. 200,000 --
1 10,000 Br. 50,000
2 12,000 100,000
3 15,000 80,000
4 5,000 120,000
5 12,000 10,000
6 1,000 20,000
Harambee College CD E Page 93
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6. Economic Analysis

Economic analysis is one step forward in the project planning effort. Because as compared to
financial analysis, which should assess the impact of a project on the income o f its owners,
economic analysis is a form of more general tool of cost benefit analysis. The use o f the word
"economic" implies the analysis is undertaken is from the point of view o f the nation or the
economy as a whole. It can be seen as a cost benefit analysis from the social and nat ional
perspective. It ascertain the overall countr y impact of a project. In other words, it is the
measure o f the costs and benefits o f a project to the societ y. The exercise of project appraisa l
is not accomplished till the proposed project is also viewed from the econo mic viewpoint.
Therefore, this unit focuses on economic analysis and items included in it.

6.1. Economic Analysis

The reason for conducting both financial and econo mic analysis is to view the project from
various angles and to obtain different perspectives. Decision makers need both profiles in
order to evaluate the project and to design the necessary fiscal and monetary measures to meet
its financial requirements. Even though the tools of analysis are the same, financial analysis is
concerned with private profitability and is based on financial flows which relate to:
- market prices for products and inputs
- the terms of credit and borrowing in general
- tax and subsidy policy
- financial depreciation and other financial conventions.

Economic analysis, on the other hand, is concerned with public "profitabilit y" which is based
on economic resource flo ws. It measures the project's effect on the efficiency o f the who le
economy. In econo mic analysis shadow prices (set of prices that is believed better reflect the
opportunity cost) are used.

Economic resource flows relates to:

a) Social opportunit y costs (shadow pr ices) which adjust market prices to take into
account differences based on tax and subsidies, external costs and benefits,
Harambee College CD E Page 94
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

monopolistic pricing, price control and rationing, quant itative trade restrict ions, over-
valued (or under valued) exchange rate and labor opportunity costs.
b) Divergence between real rate of interest and nominal (financial) rate of interest, and
difference between private and social/public rate of discount.

Economic analysis consists mainly of adjustments to information used in financial analysis

and of a few additional ones.

The methodology and the criteria used to evaluate a project using financial and econo mic
information are the same. However, the main difference lies in the value that the NPV and
IRR take. This difference occurs because of the difference of:
- the items considered as inputs and outputs of the project
- the prices used in the valuation of the project inputs and outputs
- the treatment of taxes, subsidies and other transfer payments.

1. External costs and Benefits (Externalities)

Some real costs and benefits attributed to the project do not appear among it s inputs and
outputs when it is analyzed from the company's viewpo int and they do not enter in the
calculation of NPV and IRR. The reason is they are considered as "external" to the
organization. But they are internal from economy's angle and included in the calculation o f
IRR and NPV. Because, somebody pays for such externals and so mebody receives the
benefits of such externals even if it is not the enterprise. Therefore, to the extent they can be
measured and evaluated they are included in the economic analysis. Examples of externalit ies
include access to roads, energy lines, sewerage services, flood control dams etc. Externalities
in short are costs or benefits to the economy as a who le that are attributed to the project but
not taken into account in estimating quantities and values for the project inputs and outputs.

2. Prices of Inputs
As it is shown in the table above, another difference between financial analysis and economic
analysis is that even inputs and outputs are "internal" to both the single firm and the economy,
they are valued differently. In financial analysis the need is to value input over output at
actual market prices while in economic analysis shadow prices are emplo yed. Consequently,
Harambee College CD E Page 95
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

using different prices will give different econo mic and financial NPV and IRR, even if t he
inputs and outputs are identical in physical terms.

Domestic/market price is a price we can get in the market. It is set by cost plus certain
percentage of margin. Whereas, shadow price is est imated price. They are not observed
prices. One cannot find them in t he market. They are est imated by the macro planners and are
taken as given by the project analysts in all types of projects.

3. Transfer Payments
The third reason why financial and economic NPV and IRR might differ emanates fro m the
treatment of taxes, subsidies and other transfer payment. Transfer payments are payments that
are made between different persons or organizatio ns but are not related to any particular
resource cost. This payments affect the distribut ion of income but do not affect the volume o f
resources available to the country is economy.

Taxes and custom dut ies from which the enterprise is not exempted are taken as costs in
financial analysis. But they are excluded from economic analysis because they do not reflect
the commitment of real resources. Similarly, subsidies paid to the enterprise fro m the
government are viewed as transfer payments and are omitted in econo mic analysis, but the y
are treated like any other revenue o f the enterprise in the financial analysis that is, IRR and
NPV calculations.

4. Discount Rate
In financial analysis the discount rate used is simply the rate the sponsors expect they will
have to pay for borrowed funds or the rate they wish to receive on capital invested. However,
in economic analysis accounting or shadow prices are used, which are believed to be more
compet it ive, to receive signals that will guide the allocation of resources and the structure of
domestic production.
For economic analysis purpose, all the inputs and outputs of the project are valued at world
price which are formed independent of whatever distortions prevail in the domest ic market.
These world prices are known as accounting or shadow prices estimated as border prices in
the form of Cost Insurance and Freight (CIF) for the imported and FOB (Free On Board) for
the exported commodities.
Harambee College CD E Page 96
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Chec k your progress questions

1. What is the purpose of economic analysis?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _

2. What are the differences between financial and economic analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
6.2. Objectives/Reasons for Economic Analysis

In project planning there are two main objectives to economic analysis. These are:
1. to provide information for making decisio ns on the acceptabilit y of projects from the
national point of view, and
2. to provide information of value for project design and planning, macro economic
planning and economic research.

Economic analysis broadens the analysis from confining attention to the project itself to
investigating the impact of the project on the national economy.

Economic analysis is the core of pro ject analysis and evaluat ion. It is made to ascertain the
overall country impact of a project. It is a measure of the costs and benefits of a project to the
society. The exercise of project appraisal is not accomplished t ill the proposed project is also
viewed from the economy viewpoint.

Economic analysis substitutes shadow price (economic prices) for market prices because
market prices do not reflect their true or scarcit y prices. Regardless of their difference,
financial analysis is the base for economic analysis. It provides the necessary information to
be used for economic analysis.
Social Cost Benefit Analysis/Economic analysis is done because of the following reasons.
1. Inflation
2. Currency over valuation
3. Existence of under employment:
4. Existence of income/wealth inequality
5. Externalities
6. Existence of tariffs, customs and duties
Harambee College CD E Page 97
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

The existence of the above mentioned factors demands econo mic analysis so that the value of
inputs and outputs of a project can reflect its real value. Markets like commodity market,
labor market, foreign exchange and capital markets are highly distorted in developing
countries. Therefore, adjustment of price to reflect the real cost of resources should be made
using shadow prices, which is a set of prices that better reflect the opportunit y costs of goods
and services in their best use. The object ive of economic analysis is utilization or best use o f
the scarce resources of a nation.

Economic analysis, to achieve it s intended purposes, should fo llow the fo llowing steps. These
a re :
Step 1: Identify and eliminate transfer payments. As it is explained above, transfer payments
like duties, taxes etc should be eliminated. Turning the economic analysis.
Step 2: Identify linkages and externalities
Step 3: Identify the effect on the use or creation of traded goods
Step 4: Identify the effect of the project on the employment of labor.

A frequent cause of confusio n is that project analysis can be applied in different ways, fro m
different perspectives. This may give the impression that there are conflict ing measures o f
project worth. The following table attempts to clarify the techniques used to analyze projects,
their objectives and indicators that can be calculated at each analysis level.

Levels of Project Analysis

Perspective What is measured? Indicator
Financial Owners or lenders Change in private income for owners FNPV, FIRR
analys is or lenders
Economic National econo my Change in nat ional income ENPV, EIRR
analys is
Distribut ional All groups affected by the Distribut ion of change in nat ional Proportion of ENPV
analys is project. income going to target group or
eg., government, lenders, cost of income change for
workers, owners, etc target group

Note: FNPV, FIRR stands for financial NPV and IRR respect ively
ENPV, EIRR stands for economic NPV and IRR respectively.

Page 98
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

More recently, there has been a renewal of interest in the distribut ional impact of projects
associated with attempts to determine the fiscal impact of projects (effect on government
income). Although it is not always straightforward in principle it should always be possible to
show how the income of different groups is affected by pro ject. The easiest way to do this is
to show how projects econo mic net present value ENPV (discounted value o f the change in
national income), is allocated between different groups. Normally, the ENPV may composed
of positive income steams for some groups and negative ones for others. In other words, in
reality there are losers and gainers of the inco me of the project. Identifying these groups is
known as distributional analysis.

Chec k your progress questions

3. What are the reasons for economic analysis?
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _

4. What are the steps for economic analysis?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
6.3. Shadow Prices

Shadow prices are a set of prices that are believed to better reflect the opportunit y cost of
resources in their best use. They are emplo yed instead of domestic market prices in guiding
the allocation of resources since the later is distorted and using them would lead to resource
misallocation.

Shadow prices for econo mic analysis are based on the opportunit y costs. If costs can be
broken down into basic resource categories on an opportunity cost basis, all that remains to be
done is to value the basic categories according to their opportunity cost.

6.3.1. Opport unity Cost

Before we proceed to the discussion of shadow price and its calculat ion, let us first outline the
opportunit y costs of resources because opportunit y cost is the mo st important concept
underlying economic analysis. It is defined as the next best alternative foregone in
Harambee College CD E Page 99
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

undertaking a course of action. Whenever, there is an opportunit y cost, there is an argument

for using shadow prices. Opportunity cost can best be explained by reference to examples
commonly used in the economic analysis of projects: land, labor and capital.

a) Opportunity Cost of Land

In economic analysis land is not usually treated as a capital value. The opportunity cost of
land is defined by its next best alternative use. Urban land can be used for houses, offices,
shops and factories. Rural land is normally used for crops, pasture, forestry or somet imes
conservation.

The opportunit y cost of rural land is likely to be ver y important in the assessment of any
agricultural or agro industrial project. When agricultural land is being used, the opportunit y
cost is the value of the alternative crop produced less the other costs involved in producing the
crop. For urban land the opportunity cost is usually defined by rental values.

b) Opportunity Cost of Labor

Opportunity cost of labor is the value of the worker's output in the next best alternat ive. It
usually varies significantly between occupational groups and often between regions. In
determining the opportunit y cost of labor it is important to identify the potential source of
labor (urban or rural). Project appraisal also dist inguish between skilled and unskilled labor.
The most common assumption is that skilled labor is in scarce supply and has an opportunit y
cost equal or greater than its market price, while unskilled labor is in excess supply and has an
opportunity cost below its market price.

The first assumption implies that skilled workers are able to obtain the same salary whether
they work on the project in question or on another project. This assumption is reasonable for
most countries including Ethiopia. For our country, on the other hand, the labor category
assumed to be in excess supply are formal sectoral rural and urban unskilled labor. The largest
potential source of unskilled labor is the agricultural sector.

Skilled labor was assumed to be relatively scarce and so the opportunity cost of skilled
manpower was assumed to be the same as the market price. The opportunit y cost is assumed
to consist of outputs of the various sectors in proportion to the estimated emplo yment of
skilled labor in each sector.
Harambee College CD E Page 100
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

c) Opport unity Cost of Ca pital

In principle the opportunity cost of capital (investment funds) for an individual, a company or
an economy is the rate of return available on the next best alternative pro ject. For an
individual or company the bank interest rate may give a reasonable guide. Because the
alternative to investing in a project is to lend to a bank that pays a periodic interest. However,
it is not easy to direct ly est imate the opportunity cost of capital for an econo my at large
because economic analysis using shadow prices is not applied consistently to all projects.

d) Opport unity Cost a nd Tra ded Goods

Traded goods are those items, which can be imported or exported. The opportunit y cost of
traded goods to an economy is defined by their border prices (CIF for imports and FOB for
exports). This can be understood using the following example.
Assume that the country produces sugar to satisfy the local market. The alternative to
production of the sugar is to import the sugar. The value of the sugar produced is then the CIF
(Cost Insurance and Freight) price, which has been saved. Similarly, if a textile factory use
locally produced cotton as a raw materials the alternative is to export the raw material
(cotton). The opportunit y cost of using the cotton for the textile project is the export price
(FOB) foregone.

There are four main t ypes of traded goods. The basic for their valuation can be summarized
as:
i) Imported input (opportunit y cost: foreign exchange foregone i.e., the input price
plus the cost of transport and handling to the project)
ii) Locally produced import substitute (opportunity cost: foreign exchange saved (the
import price) plus transport and handling costs from boarder to the point of sale
minus transport from the project to the point of sale.
iii) Exported output (value foreign exchange earned (the export price) minus transport
and handling from the project to the boarder.
iv) Diverted export as an input.
Harambee College CD E Page 101
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

e) Opportunity Cost and Non-Trade d Goods

Most projects, in addit ion to imported inputs and exported outputs, use inputs and produce
outputs that are not traded internat ionally. Goods and services produced and so ld in a country
only are defined as non-traded. They do not enter world trade either because of their nature,
eg. Electricit y, unskilled labor, inland transport etc or due to trade barriers and other special
reasons such as high transport cost, government policy etc.

The value of non-traded items is est imated by decomposing them in to traded and non traded
elements. The former is valued at boarder price directly and the later at specially est imated
shadow prices or at domestic prices multiplied by conversio n factor. (Conversion factors are
covered in the following section of this material).

6.3.2. Conversion and Adj ust me nt Factors

Shadow prices are often applied using either conversion factors (CF's) or adjust ment factors
(AF's). Ideally, all project inputs and outputs should be valued directly at accounting
price/shadow price or boarder prices. However, this is not always possible because so me of
the goods and services are not traded and for them you know only the do mest ic price. This
price mo st of the times is distorted due to several reasons. Therefore, it should be translated
into shadow prices using conversion factors.

Conversion factor (CF) is the factor by which we multiply the actual price(s) in the do mestic
market of an input or output to arrive at its economic price, when the later cannot be observed
or estimated directly.

How and H ow Ma ny CF's S hould be Estima ted?

A CF is est imated by taking the rat io of border prices to domest ic price/s of the goods. We
can estimate commodit y specific, service specific or sector specific conversion factors,
depending on the degree of aggregation desired.

Most literatures shows that at least three conversion factors need to be estimated. These are:
1. Standard Conversion Factor (SCF): SCF is an all inclusive conversio n factor used in
place of commodity specific CF's or sectoral specific CFs. It is a summary and
approximation of the distortions in the domestic market. It is estimated as the ratios of the
Harambee College CD E Page 102
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

values of imports and exports of the country at boarder prices (CIF and FOB) to their
value at domestic prices
2. Shadow Wage Rate (SWR): it is the opportunity cost of labor or marginal productivit y o f
labor. In principle shadow wage rate is determined by the opportunit y cost of labor which
may be adjusted for any difference between the shadow price and market price o f the
commodities produced by workers in their alternative occupations.

The conventional approach to estimating the shadow wage rate is to adopt the following
procedure:

a) determine the opportunit y cost of labor (OC) by finding out the next best
alternative occupation for labor of the category under considerat ion and the
number of days worked (N).
b) estimate the additio nal costs (AC) associated with transfer to work with the
project from the alternative occupation.
c) Estimate a conversio n factor for the output of the worker in the alternative
occupation without the project (CFW)

where: OC = opportunity cost

The shadow wage rate is then given by: N = Number of days
CFW = Conversion factor
SWR = OC.N. CFW + Ac
Chec k your progress questions

1. If the average daily wage rate of a worker is Birr 5 and workers are able to work for 250
days per year, and if it is estimated that the conversion factor for the alternat ive output of
the workers is 0.95. The extra cost of transferring the worker to the new occupation (to the
project) is Birr 150,000 per year, what is the SWR for the unskilled workers?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ .

Solution: Birr. 150,675 per year

In economic analysis the concern of project analysts is to know the economic price of labor
(ERL), which is calculated as: Market Wage Rate (MWR) t imes shadow wage rate. (EPL =
Harambee College CD E Page 103
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

MWR x SWR). If there is no distortion in the market wage rate, there could be equalit y o f
MWR and EPL.

When you estimate the EPL you have to know the original place or source of labor and the
foregone output. For example, assume if some member of the family migrates from rural area
to the project site (to work) there is a foregone output that is the output that he/she can
produce in the families plot of land. In the pro ject he/she is paid the MWR, which may be
higher than the previous work. Therefore, there is some distortion, which need so me
adjustment using conversion factors.

The conversion factor can be calculated as follows:

CF = foregone output = Daily Wage Rate
Market w age rate MWR

Chec k your progress questions

1. If a person co mes from the rural area where he can produce fro m one hectar of land 10
quintal of Teff and one house ho ld has 5 members. The price o f one quintal o f teff is Br.
250. What is the opportunity cost/foregone output?

The yearly output of the family in their original place (rural area) is Br. 2500 (250 x 10). The
average yearly price of labor in the family is Br. 500 (2500/5).

Therefore, the foregone output of the person is Br. 500/250 = Br. 2 per days assuming that the
person can work for 250 days per year. Therefore, the opportunit y cost or foregone output
from his region is Br. 2 per day. However, if he is paid Br. 6/day or more in the project, this
shows that there is so me distortion in the market wage rate. In order to adjust this distortio n
you have to calculate the conversion factor.

Solutions

CF = Foregone output
MWR

CF = 2
6

CF = 0.333
Harambee College CD E Page 104
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

If the cost of labor in the financial analysis shows Br. 100,000, the econo mic cost would be
Br. 33,300 (0.333 x 100,000). If the CF>1, it shows that labor is overprice whereas if CF<1, it
shows that labor is under priced in the project.

3. Foreign Exchange: this is also another national economic parameter. In most developing
countries the capital market is distorted. When there is a shortage of foreign exchange, the
official exchange rate understates the value o f foreign exchange. Therefore, shadow
exchange rate (SER) should be used in pro ject analysis. Use o f a SER should encourage
those projects which eit her save or earn foreign exchange and discourage those projects
which use foreign exchange.

Shadow exchange rate (SERS) are usually expressed as conversion factors to be applied to
the official exchange rate rather than as a rate of Birr to the dollar or pound. The reasons is
that we are concerned wit h the value o f foreign exchange as a whole rather than the value
of particular currencies.

4. Discount Rate (DR): estimat ion o f the discount rate (DR) is always a problem area in
economic analysis. It is the rate at which the streams o f costs and benefits are discounted
in est imating the NPV and IRR o f a project. DR is another nat ional economic parameter
and should be determined by national planners. DR is however, the most difficult to
estimate. It is important to have information about the availabilit y o f funds, interest rate,
sources of funds and import and export values.

To conclude, these are the major national economic parameters used to make econo mic
analysis. All parameters (shadow prices) reflect opportunit y cost. They are very important for
project planners because they show the alternat ive side of the project, what it will contribute
to the economy and to the society.

Once the financial and economic analysis are done and if the pro ject is worthwhile to take, it
should be put into action, that is, it should be implemented. The next unit is devoted to the
discussion of project implementation.
Harambee College CD E Page 105
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6.4. Summary

Economic analysis is one of the important tool of analyzing the feasibilit y of a project from
the social or national viewpo int. Its information source is the financial analysis wit h some
adjustment and some other additional ones.
The core objective of economic analysis is
® To provide information for decision making on the acceptabilit y of projects fro m
the national point of view
® Project analysts conduct economic analysis because o f the existence o f the
following factors in an economy, that is,
· Inflation
· Currency over valuation
· Under employment
· Income/wealth in equality
· Externalities and
· Tariffs, customs and duties

The existence of these factors result in some sort of distortion in the domestic market.
Therefore, it needs some adjust ment to reflect the world price. This adjustment is done using
shadow prices and conversion factors. Shadow price/accounting prices are set of prices that
are believed to better reflect the opportunit y cost of resources in their best use. Shadow price
is applied using conversio n factors (CFs) which includes: standard conversio n factor (SCF),
shadow wage rate (SWR), foreign exchange rate and discount rate.

6.5. Answer to Check Your Progress Exercise

1 Refer Sections above each progress exercise questions.

Harambee College CD E Page 106
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6. 6.MODEL EXAMINATION QUE STIONS

1. Define the following terms
 shadow price
___________________________________________________________
 conversion factors


 opportunit y cost


2. Discuss in detail the difference and similarity of economic and financial analysis.

3. Why economic analysis is relevant?

4. Outline the steps that can be followed in economic analysis.

5. Briefly discuss the conversion factors used in econo mic analysis to adjust distortions in a
domestic market.
Harambee College CD E Page 107
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

CHAPTER FOUR
Project selection
Content:
4.0 Aims and objectives
4.1 Introduction
4.2 Selection techniques
4.3 Risk analysis
4.4 Summary
4.6 Model examination questions

4.0 Aims and objectives

At the end of this chapter you should be able to understand
 How to select project
 Project selection processes
 How analyze risk
 Risk management processes



4.1 Introduction
Capital budgeting is a complex process which may be divided into six broad phases: planning,
analysis, selection, financing, implementation, and review. The following diagram explains
this processes siquencialy.
Harambee College CD E Page 108
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Planning: Concerned with the articulation o f broad invest ment strategy and the generation
and preliminary screening of project proposals.
Analysis: The Focus of this phase of capital budget ing is on gathering, preparing, and
summarizing relevant information about various project proposals which are being considered
for inclusion in the capital budget, like detailed analysis of market ing, technical, financial ,
economic, and ecological aspects.
Selection: It addresses the question – Is the pro ject worthwhile? Project appraisal criteria are
divided into two broad categories, non-discounting and discounting.
Harambee College CD E Page 109
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.201 4

Category Criterion Accept

Payback period (PBP) PBP < target period

Non-Discounting

Accounting rate of return (ARR) ARR > target rate

Net present value (NPV) NPV > 0

Discounting Internal rate of return (IRR) IRR > cost of capital

Benefit cost ratio (BCR) BCR > 1

Financing: Arrangement of suitable financing from eit her equit y or debt sources of finance
for a project.
Implementation: Composed of project engineering and designing, negotiations and
contracting, construction, training, and plant commissio ning. For effective implementation o f
projects at a reasonable cost, the following are helpful:
• Adequate formulation of projects

• Use of principle of responsibility accounting

• Use of network techniques

Review : It should be done periodically to compare actual performance wit h pro jected
performance.

4.2 Selection techniques

4.2.1 Facets of Project Analysis
The important facets of project management are:
Harambee College CD E Page 110
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4.2.2 Feasibility Study

The feasibility study is concerned with the first four phases of capital budget ing: planning,
analysis, selection (evaluation), and financing.
It involves market, technical, financial, economic, and ecological analysis.
Harambee College CD E Page 111
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Check your progress questions

1. Discuss how to select project for implementation?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _

4.3 Risk analysis

4.3.1 Definition of risk
When someone states that there is risk in a given situation, the listener understands that the
situation is uncertainty and the outcome is expected as unfavorable.
No comprehensive definitio n exists so far. It is defined in different forms by several authors
with some differences in the wordings used. The essence however is very similar.
In general, risk refers to exposure to adverse consequences.

Page 112
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

The term risk used in different ways; the fo llowing definit io ns are given by different scho lars
and practitioners :
• Risk is the chance of loss

• Risk is the possibility of loss

• Risk is uncertainly

• Risk is the dispersion of actual from expected result

• Risk is the probability of any outcome different from the one expected

• Doubt

• Worry

• The exposure of adverse consequence

• Undesirable events

Risk has two primary components for a given event which are:
• A probability of occurrence of that event

• Impact (or consequence) of the event occurring (amount at stake)

Thus, the risk for each event can be defined as a funct ion of probabilit y and consequence
(impact); that is,
Risk = f (probability, consequence)
In general, as either the probability or consequence increases, so does the risk.
Both the probability and consequence must be considered in risk management.
Harambee College CD E Page 113
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Fig: Overall risk is a function of its components

Risk const itutes a lack of knowledge of future events. Future events (or outcomes) that are
favorable are called opportunities, where as unfavorable events are called risks. Risk by itself
has an adverse effect
Another element of risk is its cause. The lack of some thing, can induce a risky situat ion. We
denote this source of danger as the Peril.
Peril: A peril is a contingency, which may cause a loss. Or: it refers to the specific cause of a
loss. For example: - Fire is the cause of destroying of things.
The source/cause of the loss that occurs, therefore, called a peril. Peril is also called as a lo ss
producing agent.
– Hazard: A hazard, on the other hand is that the condition which creates or increases
the probabilit y of a loss arising from a given peril. This leads to the second
representation of risk:

Risk = f (hazard, safeguard)

Harambee College CD E Page 114
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4.3.2 Tolerance for risk

There is no single way to manage risk for all projects. The project manager must rely upon
sound judgment and the use of the appropriate tools in dealing wit h risk. Project manager in
terms of tolerance for risks can be classified in to three:
the risk averter or avoider,

the neutral risk taker, and

the risk taker or seeker.

4.3.3 Certainty, risk, and uncertainty
Decision making is the process o f select ing or choosing based on so me criteria, the best
alternative among alternatives. Decision making is a rational selection amo ng alternatives. It
is universal. Decision-making falls into three categories:
certainty,

risk, and

uncertainty.

Decision-Making under Certainty
The decision maker has perfect knowledge about the outcome. Thus, he is reasonably sure
what will happen when he makes a decisio n. There will be one strategy that will produce
larger gains or smaller losses than any other strategy.
Decision-Making under Risk:
Decisio n makers may only be able to attach a probabilit y to the expected outcomes of each
alternative.There usually does not exist one strategy that dominates for all states of nature, a
probability must be assigned to the occurrence of each state of nature.
Decision-Making under Uncertainty:
It is a case where neit her there is co mplete data nor probabilit ies can be assigned to the
surrounding condition. It is the most difficult for a manager.Under risk there are assigned
specific probabilities. Whereas , under uncertainty meaningful assignments of specific
probabilities are not possible. As with decision making under risk, uncertainty also implies
that there may exist no single dominant strategy.

Page 115
Harambee College CDE
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4.3 4 Risk management process

Risk management includes :
1. planning,

2. identification,

3. analysis,

4. response (handling), and

5. monitoring and control.

Plan risk management: Risk planning is the detailed formulat ion o f a program o f action for
the management of risk. It is the process to:Develop and document an organized,
comprehensive, and interactive risk management strategy.Determine the methods to be used
to execute a program‟s risk management strategy.
Risk identification: The second step in risk management is to ident ify risks (risk
identification). The manager tries to locate the areas where losses could happen due to a wide
range of perils. Poor identification leads to unplanned retention. Unplanned retention cannot
be the right decision unless it becomes right by chance.
Risk analysis: Risk analysis is a systematic process to estimate the level o f risk for ident ified
and approved risks.This involves estimating the probabilit y o f occurrence and consequence o f
occurrence and convert ing the results to a corresponding risk level. The approach used
depends upon the data available and requirements for the project.
Planning risk responses: Planning risk responses (risk handling) includes specific methods
and techniques to deal wit h known risks and opportunit ies. Response options for risks include
acceptance, avoidance, mitigation (also known as control), and transfer.Response options for
opportunities include acceptance, enhance, exploit, and share. Risk can be handled through
the following tools.
• Avoidance

• Retention (i.e Acceptance )

• Loss prevention and reduction

Harambee College CD E Page 116
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

• Combination or increasing the No of units exposed to the loss

• Separation / Diversification

• Neutralization

· Transfer

The monitoring and control: The monitoring and control process systematically tracks and
evaluates the effectiveness of risk response act ions against established metrics. Monitoring
results may also provide a basis for developing addit ional risk response strategies, or updating
existing risk response strategies, and reanalyzing known risks.
Check your progress questions
1. Discuss risk management processes?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 117
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4.5 Summary
Capital budgeting is a complex process which may be divided into six broad phases: planning,
analysis, selection, financing, implementation, and review. The following diagram explains
this processes siquencialy. Project Selection addresses the question – Is the project
worthwhile? Project appraisal criteria are divided into two broad categories, non-discount ing
and discounting.

For projects with a time durat ion of less than one year, we normally assume that the
environment is known and stable. For projects over a year or so in length, techno logy
forecasting must be considered. Economists and financial institutions forecast interest rates.
And Engineers forecast cost, technical performance, and schedule o f pro jects in a rapidly
changing environment. Given such rapid change, how can a project manager accurately define
and plan the scope of a three- or four-year project without expecting somewhat uncertain?

The inabilit y to accurately forecast technology and the associated design will contribute to a
project‟s technical risk; due to imperfect knowledge about the future, our actions are likely to
result in outcomes which are different from our expectations. This is something that is not
desirable. Risk exists because there is no perfect foresight about the future, the complexit y o f
the business environment calls for a special attention to a risk, thus, risk beco mes a fact of life
that will remain side by side with the activities of mankind.

Risk m anagement processes is developed and implemented when risk information is

available to key decision-makers. Risk management processes must include: formal planning
activity, identifying risks , Analysis to estimate the probability and predict the impact on the
project of identified risks, A risk response strategy for selected risks, and The abilit y to
monitor and control the progress in reducing these selected risks.

Risk management is setup as a continuous process. And the system should supplement other
processes such as planning, budget ing, cost control, qualit y, and scheduling. Risk
management can be necessary on almost all pro jects. The level of implementation can var y
from project to project .Risk management is particularly important when the overall stakes are
high and/or a great deal of uncertainty exists
Harambee College CD E Page 118
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

4.6.MODEL EXAMINATION QUESTIONS

1. Discuss decision under risk?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
2. What is the difference between decision under risk and uncertainty?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _

3. What are facets of project managements?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _

4. What are criterias to select a project?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
5. What is risk?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
6. Define the following terms?
· Peril
· Hazard
· Loss

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 119
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

CHAPTER FIVE
PROJECT FINANCING
Content
5.0. Aims and objectives
5.1. Introduction
5.2. Investment cost and cost of capital
5.3. Sources of finance
5.4. Summary
5.5. Model Examination Questions

5.0. Aims and objectives

At the end of this chapter you should be able to understand;
 Project cost
Investment cost
Operation cost
 Items of investment cost
 Sources of finance
Equity financing
Loan /Debt Financing



















Harambee College CD E Page 120
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.1. Introduction
The starting po int of the project financing is drawing up of a statement of pro ject cost and
benefits. The cost items included in the statement should include only cost of those
investment items, which are included in the project. The resource flow statement shows: (1)
the list of resources used in the project and (2) the resources generated by the invest ment on
the project.
5.2. Project Invest ment cost
The major elements of resource flow statements and investment items are:
1.Investment costs: invest ment costs cover capital expenditure items such as land, buildings,
equipment and furniture etc. It includes three group of costs:
(d) Initial fixed investment costs. This includes investment made for the
acquisition of land, development of land for construction purpose, civil works
(laying the foundation), equipment and machinery costs, installat ion o f the
machines or the plant, vehicle, furniture, building etc.
(e) Pre-production capital expenditure. The pre-production capital expenditure
includes: Research and development
- Pre-feasibility or feasibility study cost
- Training costs incurred before the commencement of the operation
- Recruitment of personnel costs
- Arrangement for marketing o f the product such as early advert isement to
inform the public in advance before the actual distribution of the product
to the market
- Arrangements for supplies etc.
(f) Working capital. Working capital is simply a revo lving fund. It is the
difference between current asset and current liabilit y. This is known as a
circulating fund because at the end of the project's life it can be put as a benefit
of the project. Defining the working capital requirement appropriately is
important because many projects fail while they are in operation due to
shortage of cash or working capital. The amount of the total working capita l
required depends upon the operating costs for the project.
Harambee College CD E Page 121
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

There are three basic components of physical working and capital inventories
needed for production to be cont inuous. These are: Initial stock and materials,
Work-in-process and Stock of outputs

When these three components of working capital have been est imated, they
can be summed to give the total working capital requirements in any year. The
working capital resources that need to be included in a pro ject statement are
the incremental amount (additional commitment of resources) as the
inventories build up or vary from year to year.

Generally speaking, the amount of funds required for operating needs varies from time to time
in every business. But a certain amount of assets in the form of working capital are always
required; if the business has to carry out its funct ions efficient ly and wit hout a break. The two
types of requirements are permanent (fixed) and variable.

The permanent working capital is that part of capital which is permanent ly locked up in the
circulation of current assets and in keeping it moving. On the other hand, variable working
capital changes with the volume of the output of the project.

2. Operating Costs/Production Costs. Operating costs can be divided into two: Fixed and
Variable components. Variable working capital includes items such as materials, power,
labor inputs required for manufacture which will vary directly wit h the volume o f
production while fixed costs will include maint enance, administration and manageria l
charges, etc. which will be relatively fixed with respect to the volume of production.

The total operating costs will then be the sum o f the fixed and variable costs and will
increase over the operating years until full utilization of the investment asset is reached.

a) Cost of Production
The cost of production includes
2. Material cost
3. Wages including salaries for executives
4. Utilities
Harambee College CD E Page 122
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5. Repairs and maintenance

Factory over heads.
These items include expenses for the factory as: rent, for factory, if any, insurance
premium for factory assets and factory workers, postage, telephone, fax, e-mail, etc, in the
factory, traveling expenses, depreciation of plant and machinery and other factory
equipment, proportionate management expenses, which ma y be charged to factory on the
basis of time spent by management on the project operation.

b) Admi nistrative Expe nses

This represents all indirect expenses incurred in the organizat ion including est imates for
salaries of all indirect staff, postage, telephone, fax, e-mail etc, traveling expenses, insurance
other than for the factory assets, rent, rates, taxes, electricit y etc and depreciat ions o f all fixed
assets other than factory assets other than factory fixed assets

c) Selling E xpe nses

This represents estimated expenses in sales divisio ns as per projected organizat ions and
include the items: salaries and personnel cost for sales staff and managers as planned,
publicity, advertisement, exhibitions , subsidies, commissions, discounts to dealers, and
administrative expenses of sales office including rent.

d) De preciati on
Depreciation expenses represent consumption of utilit y units contained in an asset. It relates
to the cost center where such assets are installed.

e) Producti on B uild Up
In the first years o f operation, a project may not be 100% build up or it may not utilizes the
full capacity. It build up over the years o f its operation. From the technical details o f the plant
and machinery and the available other resources as manpower, space etc. an estimation of the
plant‟s installed capacit y is worked out. Once the installed capacit y is worked out, estimation
is made about the plant‟s operation achieving from the init ial zero to eight y or ninet y percent
of the installed capacity. The peak is achieved in a span of three or four years fro m the start in
the phase manner.
Harambee College CD E Page 123
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.3. Sources of Finance

Various sources to finance the project should be ident ified and the various financial sources
for execution are listed and shows where from the finance fined to be used in the project.
The possible sources of finance are basically,
Equity or share contribution by the promoters

Bank loan

At times, suppliers credit could be another source

The financing scheme should clearly be presented in a tabulated form showing source of
finance for each investment item both in terms of amount & percentage. Availability of
contingency funding should also shown if available.
Harambee College CD E Page 124
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.4. Summary
The major elements of resource flow statements and investment items are:
Investment costs are costs that cover capital expenditure items such as land, buildings,
equipment and furniture etc. It includes three group of costs: init ial invest ment cost, pre-
operating cost and working capital.

Operating costs can be divided into two: Fixed and Variable components. Variable working
capital includes items such as materials, power, labor inputs required for manufacture whic h
will vary directly with the volume of production while fixed costs will include maintenance,
administration and managerial charges, etc. which will be relatively fixed with respect to the
volume of production.
The possible sources to finance the project are,
Equity or share contribution by the promoters

Bank loan

At times, suppliers credit could be another source


























Harambee College CD E Page 125
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5.5 Model Exa mination Questions

1. Define the following terms
Investment cost


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _
Initial investment cost


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _
Pre-operating cost


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _
Working capital


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _
Operating cost


_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _
3. What are components of working capital?

__ _ __ _ __
4. What are sources of project financing?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 126
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

C H A PTE R S I X
Project Management and Implem entation

Contents:
6.0 Aims and Objectives
6.1 Introduction
6.2 Project Management
6.1.1 Project Planning
6.1.2 Project Control
6.1.3 Human Aspects of Project Management
6.2 Pre-requisite for Successful Project Implementation
6.3 Why Do Development Projects Fail
6.4 Summary
6.5 Answer to check your progress questions
6.6 Model examination questions

6.0 Aims and Objectives

After reading this unit you should be able to:

- understand project management
- explain project planning and control
- understand pre-requisite for project implementation and
- outline the causes of project failure
Harambee College CD E Page 127
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6.1 Introduction

The importance of implementation phase of a project is not over emphasized because a nicely
designed project may fail or the expected benefit may not be realized due to poor
implementation.

Implementation begins immediately after the final decisio n on the project and ends when it
starts rendering the benefits envisaged. While in earlier stages of project planning there was
more thinking and less action, in this stage more act ion and less thinking is needed. It is a
point at which conclusions are reached and the decisions made are put into action.

6.2 Project management

In order to accomplish the construction and supervision tasks of the project cycle good project
management system is needed that can perform physical and financial performance analysis
while the project is put into action.

Project management is a management discipline in which people work together for a co mmo n
goal. It invo lves planning, organizing, staffing, directing and controlling the to achieve a
specified objective of the project. The project team should prepare an implementation
schedule and should work for it in order to put the project into action. This schedule also
serves as a yardstick against which performance can be evaluated (controlling). It can be used
to evaluate the physical process per time, cost and/or effort.

6.2.1 Project Planning

Projects involving few activities, resources, constraints and inter-relat ionships can be
visualized easily by the human mind and planned informally. However, when a project
become larger and complex, informal planning has to be substituted by formal planning. The
need for formal planning is indeed much greater for project work than for normal operations.
Without effective planning, there may be chaos.

Project planning serves several important functions. The major ones are:
1. It provides a basis for organizing the work on the project and allocating
responsibilities to individuals.
Harambee College CD E Page 128
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

2. It is a means of communication and coordination between all those invo lved in the
project.
3. It induces people to look ahead.
4. It instills a sense of urgency and time consciousness
5. It establishes the basis for monitoring and control.

A comprehensive project planning covers the following activities.

- Planning the pro ject work. The activit ies relating to the project must be spelt out in
detail and they should be scheduled and sequenced properly.
- Planning the manpower and organization. The manpower required for the project must
be estimated and the responsibility for carrying out the project work must be allocated.
- Planning the financial aspects of the project through budgeting.
- Planning the information system.

Project planning can be facilitated using planning tools/techniques. The two important tools of
planning are the Gantt Chart and the network techniques. The Gantt Chart is a pictorial device
in which the act ivities are represented by horizontal bars on the t ime axis. In network
techniques, the activities, events and their inter-relat ionships are represented by a network
diagram.

Most projects fail as a result of poor project management team and lack o f coordination and
poor monitoring activit y o f the team. One o f the main task of pro ject management team is to
organize people and physical resources in a proper way. The team also should be transparent
for both the management and operational workers of the project.

6.2.2 Project Contr ol

No sooner is the project launched, control becomes the dominant concern o f the pro ject
manager. Indeed, once the launch phase is over, planning and control become closely
interviewed in an integrated managerial process.

Project control involves a regular comparison o f performance against targets, a search for the
causes and deviation, and a commitment to check adverse variances. It serves two major
functions:
Harambee College CD E Page 129
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

1. it ensures regular monitoring of performance, and

2. it motivates project personnel to strive to achieving project objectives.

Effective control is crit ical for the realization o f project object ives. Yet, control o f pro jects in
practice tends to be ineffective. The basic reasons may be:
- Characteristics of the project: most of the projects are large, co mplex undertakings
involving many organizations and people. This renders the task of control difficult.
- People problems such as lack of experience, training, competence and inclinat ion to
control projects.
- Poor control and informat ion system: one of the factors which inhibits effective
control is the poor qualit y o f control and information system. The main weaknesses
observed in the control and information system are:
o Delay in reporting performance
o Inappropriate level of detailness of the data
o Unreliable information.

The project team also should perform monitoring and evaluat ion act ivities. They are briefly
explained as follows:

1) Monitoring
Monitoring is a timely gathering of informat ion on project inputs, outputs and co mplementary
activities that record the progress of a project towards the achievement of its objectives.

Monitoring is not a one time act ivit y rather it is done throughout the life o f the project. It
compares the actual outputs and inputs with the expected or planned levels o f input to be used
and output to be produced.

Monitoring result should alert project managers and policy makers to actual and potentia l
implementation problems requiring connective action. It requires a simple, clearly and easily
operational systems. Monitoring can be done through field visits and interviews. Regardless
of the way it is going to be done, the who le purpose of monitoring system is to improve the
effects of the project management team, while they are invo lved in putting the pro ject to
action as per the schedule.
Harambee College CD E Page 130
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

In developing a system o f monitoring, the following points should be taken into

consideration:
a) it should focus sharply on the critical aspects of project implementation
b) it must lay more emphasis on physical milestones and not on financial targets
c) it must be kept relatively simple o f made over-complicated, it may lead to
redundant paper work end diversion of resources
d) it must be viewed that monitoring is not an end in itself rather as a means to
implement the project successfully.

2) Evaluati on/ Varia nce Analysis

Evaluation is primarily concerned wit h co mparing the actual project efforts and impacts
against the established standard/plans in order to determine the variance. Mostly it is
considered as a post action. But it can be considered as both ongoing and ex-post action of the
project's control effort. The on going evaluation is done throughout the life o f the project but
the ex-post evaluation is an action taken at the final performance o f the project. The ex-post
analysis/evaluation is inadequate for project control because it is a backward looking rather
than forward looking and it does not use the data effectively to provide integrated control. Ex-
post/post audit action of a project control:
- provide a documented log of experience that may be valuable in improving future
decision making
- enable the firm in identifying individual with superior abilities in planning and
forecasting
- help in discovering systematic biases in judgment
- induce healthy caution among project sponsors, and
- serve as a useful training ground for promising executives who need broader business
experience and exposure.

Evaluation is mainly concerned with determining whether the planned benefit s o f the project
have materialized and distributed to the beneficia ries o f the project. Evaluation takes longer
time than monitoring. Similarly, it also requires more specialist skills both from within and
outside the project.
Harambee College CD E Page 131
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6.2.3 Huma n Aspects of Pr oject Ma nagement

A satisfactory human relation system is essent ial for the successful execut ion of a project.
Without such a system, the other systems of project management, however sound they many
be by themselves, are not likely to work well. While technical problems can often be so lved
with additional investment of resources, people's problems may not be amenable to
satisfactory solution in the short span of the project life.

To achieve satisfactory human relations in the project setting, the project manager must
successfully handle problems and challenges relating to authority, orientation, motivat ion and
group functioning.

Individuals with a certain responsibility in the project should be given appropriate authority so
that they can make a right decisio n and take action on a timely basis. A project manager also
has to strengthen the managerial orientation o f project personnel so that project goals and
objectives can be effectively achieved within the constraints of time and budget.

The project manager functions within the boundaries of a socio-technical system. Most of the
factors of this system – organizational structure, technical requirements, competencies of
project personnel are more or less "given" for him. The principal behavioral factor which he
can influence is the motivation of the project personnel. In order to succeed in motivating
project personnel, the project manager must be a perceptive observer of human beings, must
have the ability to appreciate the variable needs of human beings, must have skill in several
styles of management suitable to different situations, and must be sensitive to the reactions o f
people so that he can act supportively rather than threateningly.

In a large complex project, many persons drawn from different functions, departments, and
organizations are involved. This leads to formatio n of groups, formal and informal. This
group should be effect ive; who are satisfied and committed and who strive for attainment of
project objectives.

6.3 Pre-requisites for successful projects implementation

Time and cost over runs are common in ever y country's is development projects. Due to such
time and cost over-runs, projects tend to become uneconomical, resources are not available to
Harambee College CD E Page 132
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

support other projects, and economic development is adversely affected. What can be done to
minimize this problem and thereby improve the prospects of successful co mplet ion o f
projects? While a lot of things can be done to achieve their goal, the more important ones
appear to be as follows:

1. Adequate Formation
Often project formulation is deficient because of one or more of the following shortcomings:
- superficial field investigation
- poor assessment of input requirements
- omission of project linkages
- poor judgments because of lack of experience and expertise
- deliberate over estimation of benefits and under estimation of costs
- undue hurry to get started.

Therefore, managers must take care to avoid the above deficiencies sot that the appraisal and
formulation of the project is thorough, adequate, and meaningful.

2. Sound project organization

A sound organization for implementing the project is crit ical to its success. The organizat ion
should give attention to the human side o f the project, rewards and penalties should be related
to performance and authority and responsibility should be equivalent.

3. Proper implementation planning

Once the investment decision is taken and often even while the formulat ion and appraisal are
being done – it is necessary to do detailed implementation planning before commencing the
actual implementation.

4. Advance action
When the project appears to be viable and desirable, advance act ion on the fo llowing
activities may be initiated:
- acquisition of land
- securing essential clearances
- identifying technical collaborators/consultants
Harambee College CD E Page 133
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

- arranging for infrastructure facilities

- preliminary design and engineering, and
- calling of tenders.

5. Timely availability of funds

Once the project is approved, adequate funds must be made available to meet its requirements
as per the plan o f implementation – it would be highly desirable if funds are provided even
before the final approval to initiate advance action.

6. Judicious equipment tendering and procurement

In order to avo id time and cost over runs it is important to place a tender and choose the right
supplier of the necessary input of the project.

7. Better contract management

Since the substantial portion of a project is typically executed through contracts, the proper
management of contracts is critical to the successful implementation of the project.

8. Effective monitoring
In order to keep a tab on the progress of the project, a system o f monitoring must be
established. This helps in:
- anticipating deviations from the implementation plan
- analyzing emerging problems
- taking connective action

6.4 Why Do Development Projects Fail?

In most developed countries the failure rate of projects out weigh those, which are successful.
In most cases the following are the basic reasons for project failure.

1. Poor project planning and preparation

2. Delay in implementation
3. Cost and time over runs
4. Shortage of raw materials
Harambee College CD E Page 134
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

5. Shortage of skilled manpower

6. Lack of coordination among different project implementers or executive agencies like
electric power suppliers, road agencies, water and sewerage authority etc
7. Lack of community participation in project planning and implementation. Project
initiators should see in the first place whether the project is demand – driven or not.
Development projects must be "felt-need of the societ y" rather than a stranger to a
particular communit y of the project area. Otherwise, the project will not achieve its
intended purpose. In general, project to be successfully implemented, it should
consider all social issues.
Harambee College CD E Page 135
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

6.5 Summary

Comprehensive project planning covers the following areas: pro ject work, manpower and
organization, money, and information and control system.

The two important tools of project planning are Gantt Chart and network techniques. The
traditional approach to project control, involving a comparison of the actual cost with the
budget cost, it referred to as variance analysis.

To achieve satisfactory human relations in the project setting, the project manager must
successfully handle problems and challenges relating to:
1. authority
2. orientation
3. motivation, and
4. group functioning

Time and cost over runs o f projects are very co mmo n problems in developing countries like
Ethiopia. Hence projects tend to become uneconomical and econo mic development is
adversely affected. Therefore, projects should be effectively implemented. The following are
the pre-requisites for successful completion of projects.

· Adequate formulation
· Sound project organization
· Proper implementation planning
· Advance action
· Timely availability of funds
· Equipment tendering and procurement
· Better contract management and
· Effective monitoring

6.6 Answer to Check Your Progress Exercise

1. Refer Sections above each check your progress questions.

Harambee College CD E Page 136
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

M O DE L E XAM I NAT I O N Q UE S T I O NS
1. Why does the control of projects in practice tend to be ineffective? Explain.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
2. Discuss and evaluate project monitoring or variance analysis.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
3. Discuss the pre-requites for successful project implementation.

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
4. Why projects fail?

__ _ __ _ __ _ __ _ __ _ _ __ _ _ _ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ __ _ _ _ _ _ __ _ __ _ _ _ _ _ _ _ __ _ __ _ __ _ __ _ _
Harambee College CD E Page 137
 P r o j e c t p l a n n i ng , A n a l y s i s a n d M a n a ge m e n t
Nov.2 014

Reference:
1. Singh, Narendra, (2003). Project Managem ent and Control. 3rd Ed., New Delhi,
Himalaya Publishing House.
2. Chandra, Prasanna, (2002). Projects: Planning, Analysis, Financing,
th
Implementation and Review. 5 ed., New Delhi Tata McGraw-hill Companies, Inc.
3. Lewis, James P, (2001). Project Planning, Scheduling and Control. 3rd Ed., New
Delhi: Tata McGraw-hill Companies, Inc., , India,
4. UNIDO, (1991). Manual for the preparation of Industrial feasibility studies. UN,
New York,
Harambee College CD E Page 138