Pm unit ii - feasibility study of project

Prepared By Ghaith Al Darmaki

[email protected] for Engineering Business Managers

Manchester Business School

Project Management - Unit II Prepared By: Ghaith Al Darmaki 2

Introduction Market Analysis Technical Analysis. Financial Analysis.


Chapter one:Definition of Project management and

impact of different elements on projects.Discussed the tools and techniques used

to generate and screen the project idea.

Project Idea is selected.


Project Idea is selected.

“should we proceed with the proposed project idea?”“ Is the idea Possible, Viable, Practical,”

Feasibility study


A Feasibility study of project is done with a goal to identify the existing strengths and weakness of the project.

A Feasibility study of project includes Market analysis. Technical analysis. Financial analysis. Economic.Ecological analysis


Market Analysis: The first step is to estimate the potential size of the market for the product proposed in the project and get an idea of market share that is likely to be captured.

Market and demand analysis are concerned with two broad issues:What is the likely aggregate demand for the

product/service?What share of the market can be captured?


The steps in market analysis:

Collection of secondary information

Situational analysis and specification of objectives

Market Survey

Characterization of market

Demand forecasting

Market planning


Step (1) Situational analysis and specification of objectives:

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

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

The objectives should be defined clearly and comprehensively.

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





Market Survey


Demand forecasting

Market planning


Step (2): Collection of secondary information: Secondary information is the information that has been

gathered in some other context and is already available provides a base point for market and demand analysis.

Sources of secondary information are:National sample survey reportsPeoples of planning commissionEconomic survey of industries Industry potential surveys Annual survey of industriesReports of CBOReports of Muscat securities exchange.Reports from chamber of commerce and industries.


Evaluation of secondary information: While this information is available readily , its reliability, accuracy and

relevance for the purpose under consideration must be carefully examined.Who gathered the information?What was the objective?When the information was collected? How representative was period for which the information was

gathered? Are the terms was selected?What was the sample size? How representative was the sample? How satisfactory was the process of information gathering?What was the degree of misrepresentation by respondents? How accurate the information analyzed?





Market Survey


Demand forecasting

Market planning


Step (3): Conduct of market survey: The secondary information must be supplemented with

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

The objectives of the market survey should be to sought the information of any one or all of the following : Demand and rate of growth of demand Demand in different segments of market Income and price elasticity of demands Motives for buying Satisfaction with existing products Attitudes towards various products Socio-economic characteristics of buyers.


Steps in a sample survey are:Define the target population.Select the sampling scheme and sample size.Develop the questionnaire.Recruit and train field workers.Collection information from the sample of respondents.Scrutinizing the information.Analysis the information Interpreting the results.

Problems: Heterogeneity of the country.Multiplicity of language.Design of questionnaire.





Market Survey


Demand forecasting

Market planning


Step (4): Characterization of the market:

Based on the secondary sources and market survey the market for the product may be described in terms of :Breakdown of demandPriceMethods of distribution and sales promotionConsumersSupply and competitionGovernment policy


Breakdown of demand: Nature of product: One generic name often subsumes many different

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

Consumer groups: Consumers may be divided into: industrialThese may be further subdivided industry wise. Domestic These may be further subdivided into : income groups, age groups etc.

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

Price: It may be helpful to distinguish different types of prices like manufacturers price as FOB price or CIF price Landed price for imported goods Average wholesale price Average retail price


Methods of distribution and sales promotion:Different distribution channels depending on nature of

productsSales promotion (advertising, discounts etc.)

Consumers: Consumers may be characterized based on Demographic age, sex, income, profession, social

backgrounds.Attitudes preferences, habits, attitudes, responses.

Supply and competition: It is necessary to know existing source of supply whether

foreign or domestic .Competition from substitutes and near substitutes should be

specified. Government policy: The government plans, policies have a

bearing on the market for a product.


Out of Scope





Market Survey


Demand forecasting

Market planning


Step (5) : Demand Forecasting:After gathering information about various aspects of the market from primary and secondary sources an attempt may be made to estimate future demand.

Demand Forecasting means estimating or predicting the future demand or future sales for the product of a firm. The various methods of demand forecasting are:Qualitative method Time series method Casual methods

Quantitative methods


Qualitative method: Relies on judgment of experts to translate qualitative information to quantitative estimates. The important methods are:Jury of executive methodDelphi method

Time series method: This generates forecasts on the basis of an analysis of the historical time series. The important methods are:Trend projection method Exponential smoothing method Moving average method


Casual methods: These are more analytical than the previous methods. They seek to develop forecasts on the basis of cause effect relationship specified in an explicit quantitative manner. The important methods are:Chain ratio method Consumption level method End use methodEconometric method


Uncertainties in demand forecasting: Data about past and present markets: (Lack of standardization, Few

observations, Influence of abnormal factors.) Methods of forecasting (Inability to handle unquantifiable factors,

Unrealistic assumptions, Excessive data requirements.) Environmental changes: ( Technological, Governmental,

International scenario) How to cope with uncertainties:

Conduct analysis with data based on uniform and standard definitions.

Ignore the abnormal observations. Choose method appropriate to the situation.Monitor changes in environmental factors. Consider alternative scenarios and their impact on market. Conduct sensitivity analysis to assess the impact on the demand for

unfavorable and favorable variations of the determining factor from their most likely levels





Market Survey


Demand forecasting

Market planning


Step 6: Marketing plan:

A marketing plan usually has the following components:

Current market situation Opportunity and Issue analysis Objectives Market Strategy Action Programme.


Step 6: Marketing plan: Current market situationMarket situation – Site, growth, consumer

aspirations, buying behavior.Competitive situation – major competitions their

objectives, strategies, strengths etc.Distribution situation – compare the distribution

capabilities of competitors. Macro environment – effect of social, political,

economic, technological etc. factors.


Step 6: Marketing plan: Opportunity and Issue analysis:

SWOT analysis is conducted. ( Strength, weakness, opportunity and threat).

Objectives: Clear cut, specific and achievable. SMART Objectives (out of the scope):Specific, Measureable, Achievable, Realistic, Time bound.


Step 6: Marketing plan: Market Strategy cover the following: Target segment Positioning: How a product in placed in the mind of consumers Product line Price Distribution Sales force Sales promotion Advertising

Action Programme: to enable the product to reach a desired level of market penetration, a suitable marketing plan, coveringpricing, distribution, promotion and service needs to be developed.


Example

Out of

Scope

Microsoft Office werPoint 2007 Prese





Market Survey


Demand forecasting

Market planning




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

The purpose of the technical analysis is To ensure that the project is technically

feasible, that all inputs required for the project are available.

To facilitate the most optimal formulation of the project in terms of technology, size, location and so on


Technical analysis would cover the following:1. Manufacturing Process / Technology2. Technical arrangements 3. Material inputs and utilities 4. Plant capacity 5. Location and site 6. Machineries and equipment 7. Environmental aspects 8. Project charts and layouts 9. Schedule of project implementation 10. Work schedule 11. Need for considering alternatives


1. Manufacturing Process / Technology Choice of Technology Plant capacity Principle inputs Investment outlay and production cost Use by other units Product mix Latest developments Ease of absorption

Appropriateness of technology: These would refer to those methods of production which are suitable to local economics, social and cultural conditions. Whether the technology protects ecological balance?


2. Technical arrangements: Satisfactory arrangements must be made to obtain technical know how needed for the proposed manufacturing process. When collaboration is sought the following aspects must be worked out: Nature of support from collaborators during each stage of

the project. Process and performance guarantees in terms of plant

capacity, product quality and consumption of raw materials and utilities.

License and royalty fee Benefit of collection agreement and manner of sharing

management control.


3. Material inputs and utilities: Technical analysis must define the materials ands utilities

required, specifying their properties and setting up their supply programme.

Material inputs may be classified into 4 broad categories: Raw materials classified into:( Agricultural products,

Mineral products, Livestock forest products, and Marine products)

Processed industrial materials and components. (Represent important inputs and Analysis should cover the total requirement, sources, prices etc.)

Auxiliary materials and factory supplies chemicals, packing materials, oils, grease etc.

Utilities power, water, fuel, steam etc


4. Plant capacity: Plant capacity is the production capacity or volume of units

that can be produced during a given period of time. It may be Feasible normal Capacity – (FNC) Capacity attainable

under normal working conditions calculated on the basis of installed capacity, technical conditions of plant, shift pattern, down time for maintenance and holidays.

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

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


5. Location and site: Location refers to Broad area like city, industrial zone and Site refers to Specific area or piece of land where the project would

be set up. The choice of location would depend on:

Proximity to raw materials. Proximity to market Availability of infrastructure power, transportation, water,

communication Labour availability Governmental policies Other factors (Climate, Living conditions, Pollution, Ancillary

units) The site selection would depend on the cost of site. Two or three

alternative sites must be considered and evaluated with respect to cost of land and cost of site preparation and development.


6. Machineries and equipment The requirement of machinery and equipment depends on production

technology and plant capacity and also the type of project. To determine the kinds of machinery required the following procedure may be followed: Estimate the likely levels of production overtime Define various machining and other operations Calculate machine house for each type of operation Select machineries and equipment for each function.

The equipment required may be classified into the following types:Process, Mechanical, Instruments, Control, Internal transportation, Others

Constraints in selecting machineries and equipments may be: Limited availability of power Difficulty in transport Workers not able to operate


7. Environmental aspects: A project may cause environmental pollution in various ways

hence these aspects must be properly examined.8. Project charts and layouts: Once the data is available on the principle dimensions of the

project, charts and lay out must be prepared. The important charts and lay outs drawings are: General functional layouts Material flow diagram Production line diagram Transport layout Communication layout Plant layout


9. Schedule of project implementation: As part of the technical analysis a project implementation is

also prepared. Following information is required for this: List of all possible activities from project planning to

commencement of production Sequence in which various activities have to be performed. Time required for each activity Resources required Implication of putting more resources or less resource

than normally required.


10. Work schedule: The work schedule reflects the plan of work concerning

installation as well as initial operation.11. Need for considering alternatives: There are alternative ways of transforming an idea into a

concrete project. These alternates may differ in one or more of the following aspects: Nature of project Production process Product quality Scale of operation and time phasing Location




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

Financial analysis would cover the following aspects: Cost of project Means of Financing Estimates of sales and production Cost of production Working capital requirement and its financing, Estimates of working results (profitability projections) Projected cash flow statement Projected balance sheets.


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

Financial analysis would cover the following aspects: Cost of project Means of Financing Estimates of sales and production Cost of production Working capital requirement and its financing, Estimates of working results (profitability projections) Projected cash flow statement Projected balance sheets.


Cost of project represents the sum of all items of outlay associated with a project which are supported by long term funds.

It is the sum of outlays on the following: Land and site development Building and civil works Plant and machinery Technical know how and engineering fees Miscellaneous fixed assets Preliminary and capital issue expenses Provision for contingencies etc.


Means of Financing: To meet the cost of project the following sources of finance or

means of finance may be available: Share capital (Equity and Preference capital), Term loans Debenture capital (Non convertible and convertible

debentures) Deferred credit Incentive sources ( Capital subsidy, tax deferment and

exemption) Miscellaneous sources ( unsecured loans, public deposits

and lease and hire purchase finance).


Means of Financing: To determine the specific means of finance for a

given project the following should be taken care: Norms of regulatory body and financial

institutions, Key business considerations namely cost, risk,

control and flexibility.


Estimating sales and production: The starting point of profitability projections is the

forecast for sales revenues. In estimating sales it is reasonable to assume that

capacity utilization would be somewhat low in the first year and rise thereafter gradually to reach the maximum level in the third or fourth year of operation.


Cost of production: The major components of cost of production are: Material

cost, utilities cost, labour cost and factory overhead cost. The material cost comprises the cost of raw materials,

chemicals, components and consumable stores required for production.

The cost of utilities is the sum of the cost of power, water and fuel.

The labour cost includes the cost of all manpower employed in the factory.

Factory overheads refer to the expenses on repair and maintenance, rent, taxes and insurance on factory assets.


Working capital requirement and its financing: In estimating the working capital requirement and

planning for its financing the following must be borne in mind: The build up of current assets till the rated level

of capacity is reached. The maximum permissible bank finance and the

margin requirements against various current assets.


Working capital requirement and its financing: The working capital requirement is the minimum

amount of resources that a company requires to effectively cover the usual costs and expenses necessary to operate the business.

The working capital is the difference between current assets and current liabilities

New working capital = Current assets – Current liabilities

Out of Scope


Estimates of working results (profitability projections): The profitability projections or estimates of working results are prepared based

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


Different Performance Indicators: Margin:

(gross, operating, net) margin = profit/sales turnover × 100

Return Ratios:

Out

of

Scope


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

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


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Date post:	29-Nov-2014
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Pm unit ii - feasibility study of project

Education