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Project Planning , Analysis and Management
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Kolhan university
Semiester - 4
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Sandeep Ghatuary
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 Project Planning , Analysis and Management 2

Project – Projects create productive assets. It acts as prime movers of economic development of any country. It is accomplished
by performing a set o activities. For example construction of a house is a project. A project consumes resources. The resources
required for completing a project are men, material, money and time. The nature of resources is that they are limited and scarce. If a
person wants to construct a house, the first thing that comes to his mind is the financial budget within which the work should be
completed. Thus, resource is a feature of all projects.
According to Harrison - "a project can be defined as non-routine, non repetitive, one off undertaking, normally with discrete time,
financial and technical performance goals"

Project Characteristics
• Objectives – a project has a set of objective or a mission. For example, the objective of a project may be construction of a
highway connecting two cities. Once the construction of highway completed the projects comes to an end.
• Life cycle – a project has a life cycle. The life cycle consists of the following stages- conception stage, design stage,
implementation stage, commissioning stage.
• Definite time limit - a project has a definite time limit. It cannot continue ever. Construction of a highway connecting two
cities is a project which is to be completed within a given time limit.
• Uniqueness – a project is unique and no two projects are similar.
• Teamwork – a project normally consists of diverse areas. There will be personnel specialized in their respective areas. Co-
ordination among the diversed areas calls for teamwork. Hence, a project can be implemented only with teamwork.
• Complexity - Technology survey, hiring the right kind of people, arranging for financial resources, and execution of the
project in the time e.tc. Contribute to the complexity of the project.
• Sub contracting – It will be advantageous if it reduces the complexity of the project so that the project manger can co
ordinate the remaining activities of the project more effectively.
• Rational choice – project is done after making a study of all the available avenues for investing resources and rational choice
among the available avenues made.
• Multidisciplinary – projects are multidisciplinary in nature. They make use of the knowledge and expertise of different kinds
of people.

Steps in managing a project

1. Define the problem = Identify the problem to be solved by the project. It helps to visualize the desired end result. What will
be different? What will you see, hear, taste, touch, or smell? What client need is being satisfied by the project?
2. Develop solution options = How many different ways might you go about solving the problem? Of the available alternatives,
which do you think will best solve the problem? Is it more or less costly than other suitable choices? Will it result in a
complete or only a partial fix?
3. Plan the project. Planning is answering questions = what must be done, by whom, for how much, how, when, and so on.
4. Execute the plan = Once the plan is drafted, it must be implemented. Interestingly, people sometimes go to great effort to
put together a plan, and then fail to follow it. If a plan is not followed, there is not much point in planning, is there?
5. Monitor and control progress = Plans are developed so that you can achieve your end result successfully. Unless progress is
monitored, you cannot be sure you will succeed.
6. Close the project = Once the destination has been reached, the project is finished, but there is a final step that should be
taken. Some people call it an audit, others a postmortem.
 Project Planning , Analysis and Management 3

Type of project –
• Based on the type of activity – project can be classified as industrial project and non industrial projects. Industrial projects
are set up of production of some goods. Investments in non industrial projects are made by government and the benefits
from such projects are enjoyed by the entire society of people.
• Based on the location of the project – projects can be classified as national projects and international projects. National
projects are those set up within the national boundaries of a country, while international projects are set up in others
countries. Handling of international projects needs more expertise and greater efforts in view of higher risk.
• Based on project completion time – projects can be classified into two types, normal projects and crash project. Normal
projects are those for which there is no constraint on time. Crash project are those which are to be completed within a
stipulated time, even at the cost of ending up with a higher project cost.
• Based on need – projects can be classified under the following groups, based on the need for project- new project, balancing
project, expansion project, modernization project, replacement project.
• Based on size – project can be classified based on the size into three categories – small projects, medium project and large
projects. As per directives of the govt. of India, project with investment on plant and machinery up to rupees 1 crore are
categorized as small project while those with investment in plant and machinery above rupees 100 crore are categorized as
large project. Project with investment limit between these two categories are medium scale projects.
• Based on ownership – projects can be classified into private sector projects, public sector projects and joint venture
projects. A private sector project is one in which the ownership is completely in the hands of the project promoters and
investors. Profit maximization is the prime objective of private sector projects. Public sector project are those that are
owned by the state. The evolution and growth of public sector enterprises is the natural consequence of the efforts of
government for undertaking developments in a country. Joint sector projects are those in which the ownership is shared by
the government and by private entrepreneurs. The main consideration for government's investment in joint sector projects
is to make use of the managerial talents and marketing skills of the private entrepreneurs.

Project management – project management is an organized venture for managing projects. It involves scientific application
of modern tools and techniques in planning, financing, monitoring, controlling and coordinating unique activities or tasks to produce
desirable outputs in accordance with the pre determined objectives within the constraints of time and cost. It was considered to be
the prerogative of construction companies. Now days, many aspects of business like innovating new product, implementing a new
process e.tc are treated as projects.
Project management consists of the following stages –
• Project planning
• Project scheduling
• Project implementation,
• Controlling and monitoring.
Every person, every organization and every nation is concerned with project management. An individual builds a house. It is his
project .Projects is the backbone of any organization since they help to create productive assets. Project offer a challenging
environment since draw the expertise and experiences of different persons and channelize then towards efficient utilization for the
creation of productive assets. Project management as a technique is assuming greater importance since it at optimum utilization of
resource. Every person is practicing project management in his day to day life. When a person uses the shortest route to reach his
office, it involves all the stages of project management.
Attributes of good product manager – an effective project manager is one who should have the following skills/ capacities –
• Planning & organizational skills
• Personnel management skills
• Change orientation
• Communication skills
• High energy levels
• Effective time management
• Integration skills
• Team building skills
• Resource allocation skills.
 Project Planning , Analysis and Management 4

Unit 1 Generation & Screening of Project Idea

Generation of Ideas – Barring truly new ideas which are based on significant technological breakthroughs, most of the
project ideas involve combining existing fields of technology or offering variants of present product or service.
The typical route may be described as follows –
• Someone with specialized technical knowledge.
• Someone other competence feels that he can offer a product or service which can cater to a presently unmet need.
• Serve a market where demand exceeds supply.
• Effectively compete with similar products or service because of certain favorable features like better quality or lower prices.
His ideas are endorsed by his associates who encourage him and even show willingness to collaborate with him on the proposal.
Finally he receives support from financial institutions and banks that approve his project and show readiness to finance it.

Stimulating the flow of ideas –

• Swot Analysis - Swot analysis represents a conscious, deliberate and systematic effort by an organization to identify
opportunities that can be profitably exploited by it. Periodic Swot analysis facilitates the generation of ideas.
• Clear Articulation – A clear articulation and prioritization of objectives helps in channelizing the efforts of employees and
prods them to think more imaginatively. The operational objective of a firm like – cost reduction, productivity improvement
e.tc
• Fostering a Conductive Climate – To tap the creativity of people and to harness their entrepreneurial urges, a conductive
organizational climate has to be fostered. Organization like Hindustan Lever is a prominent example in India has successfully
used suggestion schemes to motivate employees to think more creatively.

Scouting or Control or Spying for Project Ideas -Good project ideas the key to success is elusive. So a wide variety of source
should be tapped to identify them, here are some suggestions in this regard –
• Analyze economic and social trends – a study of economic and social trends is helpful in projecting demand for various
goods and services. Changing economic conditions and consumer preference provide new business opportunities.
• Study new technological development – new products or new processes or technologies for existing products developed by
research laboratories may be examined for profitable commercialization.
• Draw clues from consumption abroad – entrepreneurs willing to take risks may identify projects for the manufacture of
products or supply of services which are new to the country but extensively used abroad.
• Attend trade fairs – national and international trade provide an excellent opportunity to get to know about new products
and development.
• Stimulate creativity for generating new product ideas – new product ideas may be generated by thinking along the
following lines – modification, reversal, magnification, adaptation and combination.
• Identify unfulfilled psychological needs – for well established, multi brand product groups like bathing soap, cosmetics,
toothpaste e.tc the question to be asked is whether there are certain psychological needs of the customers which are
presently unfulfilled.
• Analyze the performance of existing Industries – a study of existing industries in terms of their profitability and capacity
utilization can indicate promising investment opportunities.
• Review import and exports – indigenous manufacture of goods currently imported is advantageous for several reasons: it
improves the balance of payments situation, it generates employment.
• Investigate local materials and resources – project ideas may begin with an investigation into local resource and skills.
Various ways of adding value to locally available materials may be examined. The skills of local artisans may suggest products
that may be profitably produced and marketed.
• Look at the suggestions of financial institutions and developmental agencies
 Project Planning , Analysis and Management 5

Preliminary screening – It is required to eliminate ideas which prima facie are not promising. For this purpose, the following
aspect may be looked into.
1. Compatibility with the promoter – The must be compatibility with the interest, personality and resources of the
entrepreneur. According to Murphy, a real opportunity has three characteristics.
• It fits the personality of the entrepreneur.
• It is accessible to him.
• It offers him the prospect of rapid growth and high return on the invested capital.
2. Consistency with the government priorities – The project idea must be feasible given the national and governmental
regulatory framework. The questions to be raised in this context are –
• Is the project consistent with the national goals and priorities?
• Can foreign exchange requirement of the project be easily accommodated?
• Will there be any difficulty in obtaining the license of the project?
3. Availability of input – The resources and input required for the project must be reasonably assured. To assess this, the
following questions need to be answered-
• Are the capital requirements of the project within manageable limits?
• Can technical knowhow required for the project is obtained?
4. Adequacy of market – The size of the present market must offer the prospect of the adequate sales volume. To judge the
adequacy of the market the following factors have to be examined - *Export markets*Patent projection*Sales and
distribution system
5. Reasonableness of cost – The cost structure of the proposed project must enable it to realize an acceptable profit with a
price. The following should be examined in this regard –
• Economics of scale
• Labour cost
• Factory Overheads
• Service cost
6. Acceptability of risk level – In the assessment of risk a difficult task, indeed the following factors should be considered -
• Technological change
• Competition from imports
• Vulnerability of business cycle

Project Rating Index / Preliminary Evaluation

When a firm evaluates a large number of project ideas regularly, it may be helpful to streaming the process of preliminary screening.
For this purpose, a preliminary evaluation may be translated into a project rating index.
The steps involved in determining the project rating index are as follows –
• Identify factors relevant for project rating
• Assign weights to these factors
• Rate the project proposal on various factors, using a suitable rating scale.
• For each factor, multiply the factor rating with the factor weight to get the factor score.
• Add all the factor score to get the overall project rating index.
 Project Planning , Analysis and Management 6

Unit 2 Capital Expenditure, Marketing Demand & Situational Analysis –

Capital Expenditure – Steel plant is considering building a new arc furnace, an insurance company is planning to install a
computer system. All these situations involve a capital expenditure decision. Capital expenditure also referred to as a capital
investment or capital project. This involves a current outlay and future outlay of funds in the expectation of a stream of benefits. A
capital expenditure from the accounting point of view is an expenditure which is shown as assets in balance sheet. It is governed by
certain conventions, by some provisions of law, and by the management's desire to enhance or depress reported profits.

Capital expenditure of importance –Capital expenditure decisions often represent the most important decisions taken by the
firm. Their importance stems from three inter related reasons:-
• Long term effects – The scope of current manufacturing activities of firms is governed largely by capital expenditures in the
past. Current capital expenditure decisions provide the framework for future activities. Capital investment decisions have an
enormous bearing on the basic character of a firm.
• Irreversibility – The market for used capital equipment in general is ill organized. Some types of capital equipment, custom
made to meet specific requirement, the market may virtually be non-existent. A wrong capital investment decision often
cannot be reversed without incurring a substantial loss.
• Substantial Outlay – Capital expenditure usually involve substantial outlays. For example an integrated steel plant involves
an outlays of several thousand million capital cost tend to increase with advance technology.

Capital expenditure difficulties – Capital expenditure decision are extremely important, they also pose difficulties which stem
three principal sources:-
• Measurement problem – Identifying and measuring the costs and benefits of a capital expenditure proposal tends to be
difficult. Capital expenditure has a bearing on some other activities like cutting into the sales of some existing product and
improving the morale of workers.
• Uncertainty – It is impossible to predict exactly what will happen in the future. Hence, there is usually a great deal of
uncertainty characterizing the costs and benefits of a capital expenditure decision.
• Temporal spread – The costs and benefits associated with a capital expenditure decision are spread out over a long period,
usually 10-20 years for industrial projects and 20-50 years for infrastructural projects. Such a temporal spread creates some
problems in estimating discount rates and establishing equivalences.

Market demand is defined as the total amount of purchases of a product or family of products within a specified demographic.
The demographic may be based on factors such as age or gender, or involve the total amount of sales that are generated in a
particular geographic location. Assessing market demand is one of the most important ways that businesses decide what to sell and
how to go about selling the products they produce. Properly assessing the market demand for a given product is very important.
Failure to accurately project the desirability of a good or service can lead to production levels that are in excess of the number of
units that will actually be sold. As a result, the company is left with a huge inventory of finished goods that generate no profit at all.
In some cases, failing to project market demand properly is enough to force a company to go out of business. The most common way
to evaluate the desirability of goods and services within a given demographic is to implement a structured market demand analysis.
Essentially, this process seeks to identify consumers who are attracted to the products enough to actually purchase them. As part of
the market analysis, the research helps to identify the size of the market. This makes it possible to determine if the company needs
to cultivate consumer interest in a particular demographic in order to generate new business or cultivate several different markets
concurrently as a means of remaining profitable. Because market demand can change over time, companies invest resources in
constantly checking the current status of consumer wants and needs. This ongoing process often allows companies to remain
competitive with other businesses that also target the same markets, as well as keep the interest of current customers by making
improvements to existing products and possibly introducing new products that are also of interest to those same customers.

Determinants of market demand

• The size of the market. Ceteris paribus, a larger market means more demand, and a more outward market demand curve.
• The various determinants of individual demand, averaged across all economic actors in the market.
• The distribution of each of the determinants of individual demand across all economic actors in the market.
 Project Planning , Analysis and Management 7

Situational Analysis - A systematic collection and evaluation of past and present economical, political, social, and
technological data, aimed at identification of internal and external forces that may influence the organization's performance and
choice of strategies, and assessment of the organization's current and future strengths, weaknesses, opportunities, and threats.
Before developing any given marketing strategy it is important to conduct some form of analysis. This should form an essential part
of any business or marketing plan and should be reviewed over time to ensure that it is kept current. Many of my clients often ask
me what factors are important when doing this.

The elements worth considering include:

• Product Situation - What is my current product? You may want to break this definition up into parts such as the core
product and any secondary or supporting services or products that also make up what you sell. It is important to observe this
in terms of its different parts in order to be able to relate this back to core client needs. Feel free to also discuss here which
of your client’s needs your product is meeting.
• Competitive situation - Analyze your main competitors – who are they what are they up to – how do they compare –
feature/ benefit analysis. What are their competitive advantages?
• Distribution Situation - Review your distribution Situation – how are you getting your product to market? Do you need to go
through distributors or other intermediaries?
• Environmental factors - What external and internal environmental factors are there that need to be taken into account. This
can include economic or sociological factors that impact on your performance.
• Opportunity and issue analysis - Which requires conduction a SWOT analysis? Things to write down her are what current
opportunities that are available in the market, the main threats that business is facing and may face in the future, the
strengths that the business can rely on and any weaknesses that may affect the business performance.
 Project Planning , Analysis and Management 8

Unit 3 Technical Analysis, Financial Analysis of project risk

What Is Technical Analysis? - Technical analysis is a method of evaluating securities by analyzing the statistics generated
by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on
the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical
indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price
and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't
care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can
provide about where the security might move in the future.

The technical analysis is based on three assumption or principles:

1. The Market Discounts Everything - Technical analysts believe that the company's fundamentals, along with broader
economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors
separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and
demand for a particular stock in the market.
2. Price Moves in Trends - In technical analysis, price movements are believed to follow trends. This means that after a trend
has been established, the future price movement is more likely to be in the same direction as the trend than to be against it.
3. History Tends To Repeat Itself - Another important idea in technical analysis is that history tends to repeat itself, mainly in
terms of price movement. Technical analysis uses chart patterns to analyze market movements and understand trends.
Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they
illustrate patterns in price movements that often repeat themselves

Aspects of Technical Analysis –

1. Selection of process/ technology – The choice of technology also depends upon the quality and quantity of the product
proposed to be manufactured. Choosing the latest technology it must be seen that the technology has been proved
successful for large scale production. Technology can be purchased outright if the cost of acquisition is affordable
2. Scale of operations – it is signified by the size of plant. The plant size mainly depends on the markets for the output of the
project. Economic size of the plant varies from project to project. The final decision on the plant size is circumscribed by a
number of factors, the main factor being the promoter's ability to raise the funds required to implement the project.
3. Raw material – The manufacturing process and the machinery/equipment to be used also to a larger extent depend upon
the raw material , the type of raw material to be used should be chosen carefully after analyzing various factors like the cost
of different raw material available , the transportation cost involved e.tc
4. Technical know-how –Agreement should be executed between the project promoter and the know-how supplier
incorporating all essential features of know-how transfer. The agreement should also include penalty clause for non
performance of any of the condition stipulated in the agreement.
5. Collaboration Agreements – If the project promoters have entered into agreement with foreign collaborators, the terms
and condition. The collaboration agreement should have necessary approval of the government of India and does not
infringe upon any right.
6. Product mix – Customer differ in their needs and preference. In order to enable the project to produce goods of varying size
and quality as per the requirements of the customers, the production facilities should be planned with an element of
flexibility.
7.
• Selection of plant and machinery - The machinery and equipment required for a project depends upon the
production technology proposed to be adopted and the size of the plant proposed. Capacity of each machinery is to
be decided by making a rough estimate.
• Procurement of plant and machinery – Plant and machinery form the backbone of any industry. The quality of
output depends upon the quality of machinery used in processing the raw materials.
8. Plant layout – Plant layout is the arrangement of the various production facilities within the production area. Plant layout
should be so arranged that it ensures steady flow of production and minimizes the overall cost.
 Project Planning , Analysis and Management 9

Unit 4 Firm & Market Risk, Social cost Benefit Analysis

What is Market Risk? The only widely accepted theoretically derived measure of risk is market risk. Firm’s market risk or
more commonly known as “beta” follows directly from the Capital Asset Pricing Model Simply put, market risk measures the degree
to which stock’s returns co vary with the returns of the portfolio of all the assets in the economy. This is a systemic risk which is
priced because it can’t be diversified away. A stock with lower beta should have lower cost of capital and larger firm value. However,
CAPM remains a popular tool among practitioners when it comes to estimating cost of equity capital

How is Market Risk Measured?

CAPM involves expected stock and economic returns. But for the estimation of beta we use historical stock returns data. The
economic returns are proxied by the returns of value-weighted portfolio of all the stocks traded in the economy (market returns).
Apart from stock returns, we need the data on risk free return which is generally proxied by the Treasury bond returns. We
estimated the following linear model using OLS rit =α + β Mktt
Where, rit is excess stock return over risk free rate, Mktt is excess market return over risk free rate, and β is the estimate of market
risk
Most often CAPM is estimated using monthly returns. For reliable estimation of beta you will need a sufficiently long time-series of
betas: 36-60 months. If you don’t have observations available on this long series, or if you want to estimate beta yearly, you can use
weekly returns.. In some cases researcher use daily data as well. But daily stock returns series exhibits serial correlation which should
be taken into account while estimating CAPM.

Social cost benefits analysis – The main objective of an individual, a firm or a company in investing on a project is to earn
the maximum possible returns for the investment. Hence the project promoters tend to evaluate only the commercial profitability of
a project. There are some projects that may not offer attractive returns as far as commercial profitability is concerned, but still such
projects are undertaken since they have social implication. Such projects are public project like road, railway, and power projects
e.tc. such project are analyzed for their net socio economic benefits and the profit ability analysis of such projects is known as
national profitability analysis , which is nothing but the socio economic cost benefit analysis done at the national level.

Scope of SCBA
• Public Investment: SCBA is important especially for the developing countries where govt. plays a significant role in the
economic development.
• Private Investment: Here, SCBA is also important as the private investments are to be approved by various governmental &
quasi-governmental agencies.

Objectives of SCBA - The main focus of Social Cost Benefit Analysis is to determine:
• Economic benefits of the project in terms of shadow prices;
• The impact of the project on the level of savings and investments in the society;
• The impact of the project on the distribution of income in the society;
• The contribution of the project towards the fulfillment of certain merit wants (self- sufficiency, employment etc).

Role of SCBA –
• Improve transparency in decision making.
• Communicates and explain why results are as presented.
• Provide a frame work to weigh effects with each other.
• Provide insight in individual and aggregate effects.
• Open discussion among stakeholders and decision makers.
Approaches to SCBA - There are two principal approaches for Social Cost Benefit Analysis.
• UNIDO Approach,
• L-M Approach.
 Project Planning , Analysis and Management 10

Unit 5 Multiple Project constraints -In the existing environment, an organisation cannot consider a capital investment
project individually as certain pre-conditions require to be fulfilled.

Constraints: Project dependence, capital rationing and project indivisibility are factors that restrict isolated project selection. If the
acceptance and rejection of one influences the cash flow stream of the other, then the two projects are said to be economically
dependent. The three types of economic dependency are as follows:
• Mutual exclusiveness
• Negative dependency
• Positive dependency Capital rationing occurs when funds available are not adequate to undertake all the projects that are
acceptable otherwise. It also arises because of internal limitation or an external constraint. A project cannot be accepted or
rejected partially, it is indivisible, and has to be accepted or rejected in totality.

Methods for comparison: Factors like economic dependency, capital rationing or project indivisibility emphasize the need for
comparison of projects. The methods used for comparing projects are:
1. Method of ranking: Joel Dean originally proposes a method of ranking. It consists of two steps:
A. Ranking all the projects in decreasing order of the NPV’s, IRR’s, or BCR’s. Assumptions in these 4 methods are:

NPV method: The intermediate cash flow is re-invested at a rate of return equal to the cost of capital of the
firm.

IRR method: Cash flow is re-invested at a rate of return equal to or greater than the Fisherian rate of return.

BCR criterion: The intermediate funds are reinvested at a rate of return greater than the Fisherian rate of
return. Accepting all projects in that order until the capital budget is exhausted.
B. All combination of feasible projects should be defined, given the capital rationing constraint and project
dependencies. Then choosing a combination having the highest NPV is known as the feasible combination
procedure. Problems: There are two major problems related to this method

Because of the discounted cash flow criteria, conflict arises in the ranking.

Indivisibility of the project.
2. Mathematical programming approach: Two broad categories of equations are considered for formulations in the
mathematical programming approach:
• The objective function and
• The constraint equations.
The following three models are commonly used:
1. Linear programming model: Assumes that the objective function and the constraint equation are linear while the
decision variables are continuous.
2. Integer linear programming model: It is presupposed that decision variables assume a value of 0 or 1.
Advantages of the method:
• It overcomes the problem of partial projects which besets the linear programming model and.
• It is capable of handling virtually any kind of project interdependency like mutual exclusiveness,
contingency and complementary.
3. Goal programming model: It solves the programming problem of minimizing the absolute deviation from specific
goals in order of the established priority structure.
 Project Planning , Analysis and Management 11

Multi-Tasking: Why projects take so long and still go late - In most project environments multi-tasking is a way of life. This
seemingly harmless activity, often celebrated as a desirable skill, is one of the biggest culprits in late projects, long project durations,
and low project output. At the same time it is one of the least understood factors in managing projects. For companies where
projects are of strategic importance, the stakes are very high. Whether it is delivering their product or service, bringing new products
to market, or expanding/ upgrading their operations with new facilities, systems, or capabilities, the financial impact of being able to
reduce project durations and costs, increase the volume of completed projects, or simply deliver more projects on-time is enormous.
So understanding how this often overlooked practice of multi-tasking is of critical importance to most companies.

Is Multi-tasking really so prevalent? - Since multi-tasking is difficult to see or measure precisely, we need to look at some other
things to answer this question. The first issue is to understand the opportunity to multi-task. The way to see if your organization has
the “opportunity” to do bad multi-tasking is ask how many jobs/ tasks an individual has on their desk at any given point in time. If
there is more than one task that could be worked on a person’s desk then there is the opportunity for multi-tasking. When we ask
managers how many tasks are on any given persons desk at one time, the not surprising answer is usually more than five. Another
way to look at it is to recognize that in most organizations where multiple projects are being done simultaneously, the resources who
do the work on a project have to serve multiple, different project managers. For these project managers what is most important
tends to be their projects. As a result they typically create pressure on resources to do their work first, institutionalizing multi-
tasking. And when the multi-tasking starts to creep in, it initiates a negative spiral that only increases the pressure to multi-task. If
one resource starts the multi-tasking, it delays the completion of their tasks, putting some projects behind. This increases the
pressure on project managers and executives to adjust priorities to compensate, which in turn creates more, bad multi-tasking. It’s
not hard to see how this spiral quickly becomes the reality we see in many organizations where managers at all levels are quickly
pulled into managing work priorities across the organization on a daily basis. On top of it, many resources who work on projects also
support daily operational functions like QA/ QC, production, engineering, customer service. This support role means that they are
frequently presented with unexpected, usually urgent things to do which readily drive more multi-tasking. The result is that in the
majority of companies there is the opportunity and the pressure to create a significant amount of bad multi-tasking.
 Project Planning , Analysis and Management 12

Unit 6 Network Techniques for project management –

Project Planning / Network scheduling techniques -Project scheduling is concerned with the techniques that can
be employed to manage the activities that need to be undertaken during the development of a project.

Scheduling is carried out in advance of the project commencing and involves:

• Identifying the tasks that need to be carried out;
• Estimating how long they will take;
• Allocating resources (mainly personnel);
• Scheduling when the tasks will occur.
Once the project is underway control needs to be exerted to ensure that the plan continues to represent the best prediction of
what will occur in the future:
• Based on what occurs during the development;
• Often necessitates revision of the plan.
• Effective project planning will help to ensure that the systems are delivered:

Within cost;

Within the time constraint;

To a specific standard of quality

The three basic project planning techniques are Gantt chart, CPM and PERT - All monitor progress and costs against
resource budgets.

Gantt chart - Gantt charts are also called Bar charts. The use of Gantt charts started during the industrial revolution of the late
1800's. An early industrial engineer named Henry Gantt developed these charts to improve factory efficiency. Gantt chart is now
commonly used for scheduling the tasks and tracking the progress of energy management projects. Gantt charts are developed using
bars to represent each task. The length of the bar shows how long the task is expected to take to complete. Duration is easily shown
on Gantt charts. Sequence is not well shown on Gantt Charts. Gantt charts produced in this form are: graphical; easy to read; and
easy to update. Gantt chart is the simplest and quickest method for formal planning. Gantt charts can be very useful in planning
projects with a limited number of tasks and with few inter-relationships. This chart typically depicts activities as horizontal lines
whose length depends on the time needed to complete the activities. These lines can be progressively overprinted to show how
much of activity has been completed.

A Gantt chart is a horizontal bar or line chart which will commonly include the following features:
• Activities identified on the left hand side;
• Time scale is drawn on the top (or bottom) of the chart;
• A horizontal open oblong or a line is drawn against each activity indicating estimated duration;
• Dependencies between activities are shown;
• At a review point the oblongs are shaded to represent the actual time spent;
• A vertical cursor placed at the review point makes it possible to establish activities which are behind or ahead of schedule.
 Project Planning , Analysis and Management 13

CPM - Critical Path Method - DuPont developed a CPM designed to address the challenge of shutting down chemical plants
for maintenance and then restarting the plants once the Maintenance had been completed. Complex project require a series of
activities, some of which must be performed sequentially and others that can be performed in parallel with other activities. This
collection of series and parallel tasks can be modeled as a network. CPM models the activities and events of a project as a network.
Activities are shown as nodes on the network and events that signify the beginning or ending of activities are shown as arcs or lines
between the nodes.

Steps in CPM Project Planning

• Specify the individual activities - All the activities in the project are listed. This list can be used as the basis for adding
sequence and duration information in later steps.
• Determine the sequence of the activities - Some activities are dependent on the completion of other activities. A list of the
immediate predecessors of each activity is useful for constructing the CPM network diagram.
• Draw the Network Diagram - Once the activities and their sequences have been defined, the CPM diagram can be drawn.
CPM originally was developed as an activity on node network.
• Estimate activity completion time - The time required to complete each activity can be estimated using past experience.
CPM does not take into account variation in the completion time.
• Identify the Critical Path - The critical path is the longest-duration path through the network. The significance of the critical
path is that the activities that lie on it cannot be delayed without delaying the project. Because of its impact on the entire
project, critical path analysis is an important aspect of project planning.
• Update CPM diagram - As the project progresses, the actual task completion times will be known and the network diagram
can be updated to include this information. A new critical path may emerge, and structural changes may be made in the
network if project requirements change.

CPM Benefits
• Provides a graphical view of the project.
• Predicts the time required to complete the project.
• Shows which activities are critical to maintaining the schedule and which are not.

CPM Limitations - While CPM is easy to understand and use, it does not consider the time variations that can have a great impact
on the completion time of a complex project. CPM was developed for complex but fairly routine projects with minimum uncertainty
in the project completion times. For less routine projects there is more uncertainty in the completion times, and this uncertainty
limits its usefulness.
 Project Planning , Analysis and Management 14

PERT - The Program Evaluation and Review Technique (PERT) is a network model that allows for randomness in activity completion
times. PERT was developed in the late 1950's for the U.S. Navy's Polaris project having thousands of contractors. It has the potential
to reduce both the time and cost required to complete a project. In a project, an activity is a task that must be performed and an
event is a milestone marking the completion of one or more activities. Before an activity can begin, all of its predecessor activities
must be completed. Project network models represent activities and milestones by arcs and nodes. PERT is typically represented as
an activity on arc network, in which the activities are represented on the lines and milestones on the nodes. The milestones generally
are numbered so that the ending node of an activity has a higher number than the beginning node.

Characteristics:
• It forms the basis for all planning and predicting and provides management with the ability to plan.
• It enables management for best possible use of resources to achieve a given goal within time and cost limitations.
• It provides visibility and enables management to control ''one-of-a-kind" programs as opposed to repetitive situations.

Steps in the PERT Planning Process

1. Identify activities and milestones - The activities are the tasks required to complete the project. The milestones are
the events marking the beginning and end of one or more activities.
2. Determine activity sequence - This step may be combined with the activity identification step since the activity
sequence is known for some tasks. Other tasks may require more analysis to determine the exact order in which
they must be performed.
3. Construct the Network Diagram - Using the activity sequence information, a network diagram can be drawn
showing the sequence of the serial and parallel activities.
4. Estimate activity times - A distinguishing feature of PERT is its ability to deal with uncertainty in activity completion
times. For each activity, the model usually includes three time estimates:
• Optimistic time (OT)
• Most likely time (MT)
• Pessimistic time (PT)
5. Determine the Critical Path - The critical path is determined by adding the times for the activities in each sequence
and determining the longest path in the project. The critical path determines the total time required for the project.
6. Update as project progresses - As the project unfolds, the estimated times can be replaced with actual times. In
cases where there are delays, additional resources may be needed to stay on schedule and the PERT chart may be
modified to reflect the new situation.

Benefits of PERT
• Expected project completion time.
• Probability of completion before a specified date.
• The critical path activities that directly impact the completion time.
• The activities that have slack time and that can lend resources to critical path activities.
• Activities start and end dates.

Limitations of PERT
• Time and labor intensive effort is required.
• Upper-level management decision-making ability is reduced.
• There exists a lack of functional ownership in estimates.
• There exists a lack of historical data for time–cost estimates.
• The assumption of unlimited resources may be inappropriate.
• There may exist the need for too much detail.
 Project Planning , Analysis and Management 15

The differences between PERT and CPM

1. PERT uses three time estimates (optimistic, most likely, and pessimistic). From these estimates, an expected time can be
derived. CPM uses one time estimate that represents the normal time (that is, better estimate accuracy with CPM).
2. PERT is probabilistic in nature, based on a beta distribution for each activity time and a normal distribution for expected time
duration. This allows us to calculate the "risk" in completing a project. CPM is based on a single time estimate and is
deterministic in nature.
3. Both PERT and CPM permit the use of dummy activities in order to develop the logic.
4. PERT is used for Research and Development projects where the risks in calculating time durations have a high variability.
CPM is used for construction projects that are resource dependent and based on accurate time estimates.
5. PERT is used on those projects, such as Research and Development, where percent complete is almost impossible to
determine except at completed milestones. CPM is used for those projects, such as construction, where percent complete
can be determined with reasonable accuracy and customer billing can be accomplished based on percent complete.

Network Re-planning Techniques: There are two network re-planning techniques based almost entirely upon resources:
resource leveling and resource allocation.
• Resource leveling is an attempt to eliminate the manpower peaks and valleys by smoothing out the period-to-period
resource requirements. The ideal situation is to do this without changing the end date. However, in reality, the end date
moves out and additional costs are incurred.
• Resource allocation is an attempt to find the shortest possible critical path based upon the available or fixed resources. The
problem with this approach is that the employees may not be qualified technically to perform on more than one activity in a
network.
Not all PERT/CPM networks permit such easy rescheduling of resources. Project managers should make every attempt to reallocate
resources so as to reduce the critical path, provided that the slack was not intentionally planned as a safety valve. It is important to
note here that transferring resources from slack paths to more critical paths is only one method for reducing expected project time.
Several other methods are available.
These are as follows:
• Elimination of some parts of the project
• Addition of more resources
• Parallelization of activities
• Shortening critical path activities
• Shortening early activities
• Shortening longest activities
• Shortening easiest activities
Increasing the number of work hours per day In this regard, under the ideal situation, the project start and end dates are fixed, and
performance within this time scale must be completed within the guidelines described by the statement of work. Should the scope of
effort have to be reduced in order to meet other requirements, the contractor incurs a serious risk in that the project may be
canceled, or performance expectations may no longer be possible
 Project Planning , Analysis and Management 16

Unit 7 Project Review & Administrative

A Project is monitored during the implementation Phase so that time & cost overrun are minimised after a project is commissioned
its Performance Is Periodically Reviewed to see whether its Performance has been in line with expectations. If things turn sour, the
abandonment may also have to be examined.

Various facets of Project Review:-

1. Control of in progress projects: - A lot of efforts is expended in selecting capital projects, things often wrong in
implementation phase. This is evident from the frequent cost &time over-runs witnessed in practice. There are two
aspects of controlling in progress capital projects: -
• Establishment of internal control procedures
• Use of regular progress reports
2. Post-completion audits:-An audit of a project after it has been commissioned is referred to as a post audit. Regular post
completion audits of capital projects are:-
• Provide a documented log of experience that may be valuable in improving future decision making
• Enable the firm in identifying individuals with superior abilities in planning and forecasting
• Help in discovering systematic biases in judgment
• Include healthy caution among project sponsors
• Serve as a useful training ground for promising executives who need broader business experience and exposure
3. Abandonment Analysis
• Capital expenditure mgt is a dynamic process. Its cannot be regarding as a commitment till the end of project
life. As time roll-on, changes occur which can alter the attractiveness of projects or entire division.
• This technique used to analyze a new project can also be used to analyze whether an existing project should be
continued or terminated.
Behavioral issue in project Abandonment - The investment decision should be guided by the net present value. Applied
to project "continuation Vs abandonment" decision the rule says:-
• If the present value associated with abandonment is > Net present value associated with continuation.
• If the present value associated with continuation is > Net present value associated with abandonment
4. Administrative aspects of capital Budgeting
• Identification of promising investment opportunities
• Classification of investment
• Submission of proposals
• Decision making
• Preparation of capital budget & appropriation
• Implementation
• Performance review
5. Agency Problem
• Manager enjoys substantial autonomy and has a natural inclination to pursue their own goals. This is the agency
problem.
• To prevent from being dislodged from their position, managers may try to achieve some acceptable level of
performance as far as shareholder welfare is concerned.
They seek to following:-
• Preside over a big empire that gives them
• Power, stature, and high compensation.
• Pursue pet project that draw on their special skills and competencies so that their position in the organisation is
entrenched.
• Enjoy generous compensation & lavish perquisites.
• Shirk efforts because identifying & implementing high NPV projects is very demanding proposition.
• Avoid risks because acceptance of high firm-specific risks, although quite acceptable to diversified shareholders,
can threaten the security of their job and the growth prospects with the firm. Agency cost can be mitigated by
monitoring the action and behaviour of managers & by offering them right incentives that motivate them to
maximize value.
By monitoring: - Its helps in checking more visible agency problems like empire building, excessive perquisites,
managerial absenteeism, and frauds
 Project Planning , Analysis and Management 17

By incentive compensation:-A well conceived incentive compensation plan goes a long way in aligning the interest of
managers and shareholders. Following guidelines in compensation plan:-
• Integrated the incentive plan into total compensation architecture
• Select the right set of performance measure
• Use objective criteria
• Reward relative performance
• Lengthen the decision making horizon of the executives
6. Evaluating the capital budgeting System of an org.- Its may be evaluated in following criteria:
• Results
• Techniques
• Communication
• Decentralization
• Intelligibility
• Flexibility
• Control
• Review
 Project Planning , Analysis and Management 18

Unit 8 Project Financing in India

Project financing defined as the raising of funds required to finance an economically separable capital investment proposal in which
the lenders mainly rely on the estimated cash flow from the project to service their loans.

Project financing differs from conventional financing:-

• In conventional financing, cash flow from different assets and businesses are co-mingled. In project financing, cash flow from
the project related assets alone are considered for assessing the repaying capacity.
• In conventional financing, end use of the borrowed funds is not strictly monitored by the lenders. In project financing, the
creditors ensure proper utilization of funds and creation of assets as envisaged in the project proposal.
• In conventional financing, the creditors are not interested in monitoring the performance of the enterprise and they are
interested only in their money getting repaid. Project financiers are keen to watch the performance of the enterprise and
suggest/take remedial measure as and when required to ensure that the project repays the debts out of its cash generation.

Sources of finance - After the project cost is ascertained, the sources of finances available for meeting the project cost are to be
analyzed and a proper combination of the different sources shall be chosen that is most suitable for the project. The various sources
of finance can be divided into two categories - equity capital and debt capital (borrowed capital). Debt capital enforces upon the
organisation an obligation for repayment of principal and payment of interest. Equity capital does not impose any such obligation it
serves as a cushion at times when the business conditions are unfavorable leading to operational difficulties. The combination of
equity and debt should be judiciously chosen, and it will vary according to the nature of the project.
The following are the main sources of project finance -
• Ordinary Share – Equity shares are the source of permanent capital. Equity shareholder being the owner of the company
bears the risk of ownership. They are entitled to dividend on their capital invested, only after interest obligations and
dividends to preference share shareholder are paid.
• Preference Shares – Preference share bear a predetermine rate of dividend. They have priority of claim over equity share in
the matter of payment of dividend. If company incurs loss in a particular year, the dividend not paid during that year is to be
carried forward and is to be paid in subsequent year/years when the company earns profit.
• Debentures – Debentures are instruments for raising long term debt capital. The debenture holders are the creditors of the
company. The company that has borrowed money by way of debentures has the obligation to repay interest and debt on
specified dates. A company may also issue convertible debenture for mobilizing funds. Convertible debentures are those
debentures that are convertible into equity shares at the option of the debenture holder.
• Bonds – A bond is more or less similar to a debenture and these two terms are frequently interchangeable. In India, there is
a tendency to reserve the term 'bond' to public debt securities issues by the government and public sector undertaking.
• Bridge finance – Bridge loans are sanctioned by banks and financial institution in order to help speedy implementation of
the project. In the absence of bridge loan, the project implementation may get delayed for want of sufficient funds.
• Deferred Credits - Machinery suppliers provide the facility of deferred credit, provided the credit- taker offers a bank
guarantee. A project promoter wants to avail the deferred credit facilities offered by machinery supplier should approach a
bank for offering guarantee for the repayment of deferred installments to the machinery supplier.
• Unsecured loans – If there is some shortfall in the means of finance, the promoters can mobilize funds from their friends,
relatives and well wishers in the form of loan to make good the shortfall. Such loans are always unsecured i.e. the lenders
can not have any charge over the assets of the company.
• Terms loans – The terms 'Term loan' denotes long term loans offered for financing. The period of principal repayment of
such long term loans vary from 5-10 years depending upon the nature of the project. Term loans are offered by All India
Financial Institutions like LIC, IDBI, UTI, ICICI etc. The term lending institutions stipulate a certain minimum contribution to
be brought in by the project promoter towards meeting the project cost.
 Project Planning , Analysis and Management 19

Role of Financial institutions in project Financing - Project financed by a combination of equity and debt. This is more so in
respect of larger projects because of arranging for equity capital to fund the entire project may not be feasible. Equity finance is
made use of during the initial stage of project implementation. This is because financial institutions must insist the project promoters
to mobilize equity capital before releasing their loan component. In India, All India financial institutions (like IDBI, ICICI, and IFCI),
State financial corporations and banks undertake project financing. Non banking financing companies also do project financing, but
their share stands very low. All India financial institutions and state finance institutions sometimes called development bankers.
Banks are the custodian of public funds and thus they occupy the position of trustee. Hence, it is their bounden duty that they lend
money only after very careful analysis and after getting it ensured that their money land in safe hands. Development finance
institutions were set up with the objective of promoting industrial development. They played a significant role in helping new and
first generation entrepreneurs in setting up industrial ventures.
The lending decision is primarily governed by three conditions –
• The capacity of the project to repay the loan along with interest obligations, out of its own cash generations.
• The value of security offered for the loan.
• The integrity and willingness of the borrower to repay the loan in time.
The first and foremost criterion is that the project should be self sustaining that is it must be able to repay its obligation out of its
own cash generation. If this criterion is fulfilled the many objective for which the project is set up, like creation of wealth, utilization
of resources, creation of employment opportunities e.tc.
 Project Planning , Analysis and Management 20

UNIDO Approach: This approach is mainly based on the publication of UNIDO (United Nation Industrial Development
Organization) named Guide to Practical Project Appraisal in 1978.

The UNIDO approach of Social Cost Benefit Analysis involves five stages:
• Calculation of financial profitability of the project measured at market prices.
• Obtaining the net benefit of the project at shadow (efficiency) prices. (Objective of SCBA
SCBA-1)
• Adjustment for the impact of the project on Savings & Investment. (Objective of SCBA-2)
SCBA 2)
• Adjustment for the impact of the project on Income Distribution. (Objective of SCBA-3)
• Adjustment for the impact of the project on Merit and Demerit Goods whose social values differ from their economic values.
(Objective of SCBA-4)

Stage one - Net Present value of a Project is calculated as:

Here, Vt = Value of outputsts at market price at time t, Ct = Value of inputs at market price at time t., K = Discount Rate
T = Lifetime of the project, I0 = Initial cost at the start of the project.
The project is viewed as financially feasible if NPV > 0.
Stage-2: Obtaining the net benefit of the project at economic (shadow) prices
• The Commercial Profitability analysis (calculated in stage - 1) would be sufficient only if the Project is operated in perfect
market. Because, only in a perfect market, market prices can reflect the social value.
• If the market is imperfect (most of the cases in reality), net benefit of the Project is determined by assigning shadow prices price
to inputs and outputs.
• Therefore, developing shadow prices is very much vital.
General Principles of Shadow Pricing
1. Numeraire: A unit of account in which the values of inputs and outputs are to be expressed.
Numeraire is determined at-
• Domestic currency (BDT) rather than border price.
• Present value rather than future value. Because," a bird in the hand is worth two in the bush.”
• Constant price rather than current price.
2. Tradability: Tradability refers to whether a good or service is tradable or non-tradable;
non tradable; if tradable whether is fully traded or
non-traded.
traded. A good/service is tradable in the absence of or within limited trade barriers. A tradable good/service is actually
traded when-
• The import (export) supply is perfectly elastic over the relevant range of volume.
• All additional demand (production) must be made (consumed) by import (export) due to the full capaci capacity in the
domestic industry (fulfillment of demand by domestic consumer).
• The import (CIF) price is less or the export (FOB) price is more than the domestic cost of production.
3. A good/service is non-tradable; if
• Its import (CIF) price is greater than its domestic cost of production, and/or
• Its export (FOB) price is less than its domestic cost of production.
A tradable good/service that is not actually traded is called non-traded.
non
4. Sources of Shadow Pricing: Depending on the impact of the project on national economy, there are three sources of shadow
pricing
• Taxes:

If the project augments domestic production, taxes should be excluded;

If the project consumes existing fixed supply of non- non traded inputs, tax should
ould be included;

For fully traded goods, tax should be ignored.
• Consumer Willingness to Pay (CWP):

What a consumer wants to spend for a product or service.

The difference between CWP and actual payment is called consumer surplus.
• Externalities: An externalitylity is an external effect (either beneficial or harmful) causes from a project which is –

Not deliberately created by the project sponsors but is an incidental outcome.

Beyond the control of the persons who are benefited or affected by it. Not traded in the market place
 Project Planning , Analysis and Management 21

• Shadow Pricing of Externalities: Although valuation of external effects is difficult as they are often intangible in nature
and there is no market price, shadow pricing of externalities may be made indirect means such as:

The harmful effect ct of the bridge may be measured by the consumer willingness to pay for the output of the people
which has been reduced due to the bridge.

The cost of pollution may be estimated in terms of the loss of earnings as a result of damage to health caused by it.
• Capital: Investment of capital in a project causes to happen two things:

Financial resources are converted into physical assets

Financial resources are withdrawn from national pool of savings.
Thus alternative projects are foregone and there is an opportunity cost of it. The shadow price of physical assets is
calculated in the same manner in which inputs and outputs are calculated. The opportunity cost of capital (shadow price
of capital) depends on the source from which the capital has generated.
Stage – 3: Adjustment for the impact of the project on Savings & Investment
The purposes of this stage are to –determine
determine the amount of income gained or lost because of the project by different income groups
(such as project other than business, government, workers, customers etc.) Evaluate the net impact of these gains and losses on
savings Measure the adjustment factor for savings and thus the adjusted values for savings impact. Adjust the impact on savings to
the net present value calculated in stage two.
Stage – 4: Adjustment for the impact of the project on Income Distribution
Government considers a project as an investment for the redistribution of income in favor of economically weakens sections or
economically backward regions. This stage provides a vvaluealue on the effects of a project on income distribution between rich & poor
and among regions.
• Distribution Adjustment Factor (Weight) is calculated and the impacts of the project on income distribution have been
valued by multiplying the adjustment factor
factor with the particular income of a group. This value will then be added to the net
present value re-calculated
calculated in stage three to produce the social net present value of the project.
• Determination of Weights: It there are only two groups in a society, poor and rich, the determination of weight is just an
iterative process between the analysts (at the bottom) and the planners (at the top). This is called “bottom-up”
“bottom approach.
When more than two groups are involved, lved, weights are calculated by the elasticity of marginal utility of income. The marginal utility
of income is the weight attached to an income is:

Where, wi = weight of income at ci level, ci = level of income of group I, b = base level of income that has a weight of 1.0, n =
elasticity of the marginal utility of income
Stage – 5: Adjustment for Merit and Demerit Goods
If there is no difference between the economic value of inputs and outputs and the social value of those, the UNIDO approach for
project evaluation ends at stage four.
• In practical, there are some goods (merit goods),
• Social value of which exceed the economic value (e.g. oil, creation of employment etc.) and
• Also there are some goods (demerits goods),
• Social value of which is less than their economic value (e.g., cigarette, alcohol, high-grade
high grade cosmetics etc.)
Adjustment to the net present value of stage 4 is required if there is any difference between the social and economic value.
The steps of adjustment procedure are:
• Estimating the present economic value
• Calculating the adjustment factor
• Multiplying the economic value by the adjustment factor to obtain the adjusted value
• Adding or subtracting the adjusted value to or from the net present value of the project
project as calculated in stage four.
 Project Planning , Analysis and Management 22

L-M Approach: I.M.D Little & J.A.Mirlees have developed this approach for analysis of Social Cost-Benefit in Manual of
Industrial
• Project Analysis in Developing Countries and Project Appraisal & Planning for Developing Countries.
• I.M.D. little and James A. Mirlees have developed an approach to SCBA which is famously known as L-M approach.
The core of this approach is that the social cost of using a resource in developing countries differs widely from the price paid for it.
Hence, it requires Shadow Prices to denote the real value of a resource to society. (Mentioned earlier)

Features of L-M Approach

• L-M Numeraire is present uncommitted social income.
• An L-M method opts for savings as the yardstick of their entire approach. Present savings is more valuable to them than
present consumption since the savings can be converted into investment for future.
L-M approach rejects the ‘consumption’ Numeraire of UNIDO approach since the authors (L & M) feel that the consumption of all
level is valuable. This approach measures the cost and benefits in terms of international or border prices.
Why Border prices? - Because the border prices represent the correct social opportunity costs or benefits of using or producing a
traded goods.

Social Cost-Benefit Analysis (SCBA)

The resources – inputs & outputs – of a project are classified into mainly: Labor, Traded Goods &Non-traded Goods
Therefore, to find out the real value of these resources, we should calculate –
1. Shadow Wage Rate (SWR) - The purpose of computing the SWR is to determine the opportunity cost of employing an
additional worker in the project. For this we have to determine –
• The value of the output foregone due to the use of a unit of labor
• The cost of additional consumption due to the transfer of labor
L-M suggests the following formula for calculating the SWR:
SWR = m + (c'-c) + (1-1/s) (c-m)
Here, m = marginal productivity of the wage earner, c'-c = cost of urbanization, (1-1/s) (c-m) = cost of additional
committed consumption, c'= additional resources devoted to consumption, c = consumption of wage earner, 1 = value
of uncommitted resources,1/s = value of committed resources, c-m = additional consumption of labor, c' (transportation
system, e.g. road construction, motor vehicles) – c (e.g. bus rent) = cost of urbanization (e.g. road construction)
2. Shadow price of Traded Goods - Shadow price of traded goods is simply its border or international price.
• If a good is exported, its shadow price is its FOB price;
• If a good is imported, its shadow price is its CIF price.
3. Shadow price of Non-traded Goods - Non-traded goods are those which do not enter into international trade by their very
nature. (e.g. land, building, transportation) hence, no border price is observable for them. Ideally, Shadow price of Non-
traded Good is defined in terms of marginal social cost (MSC) and marginal social benefit (MSB).
L-M suggest that the monetary cost of non-traded goods be broken down into –
Labor SWR (Social Wage Rate), Tradable Social Conversion Factor (SCF),Residual components SCF.
 Project Planning , Analysis and Management 23

Appraisal -
Commercial Appraisal or Analysis or Evaluation– The commercial appraisal is concerned with market for the
product/service. The very ideas of promoting a project are to produce some product/service and to market the same to the
consumers and earning a profit thereby. Marketing management receives more attention than in earlier years because the reason
behind that the very survival of any projects depends on the question as to whether the product/service offered by the product is
successful commercially. Commercial appraisal or market appraisal of a project is done studying the commercial successfulness of
the product/service offered by the project from the following angles –
• Demand for the product
• Supply position for the product
• Distribution channels
• Pricing of the product
• Government policies.

Economic Appraisal – Economic appraisal measures the effect of the project on the whole economy. Developing countries and
underdeveloped countries face scarcity of capital and foreign exchange. Hence, policy makers are concerned as to where the scarce
resource can be directed to maximize economic growth of the country. So, the policy makers make a choice based on economic
return. This is true irrespective of whether resources are committed to a large project under taken by the government or to smaller
project under taken by an individual entrepreneur. But an individual entrepreneur, when left free to choose, is more likely to be
interested in his profit rather than having a broader perspective of the economic returns of the project. For example – let an
entrepreneur own a granite quarry consisting of high quality granite stone. If the entrepreneur is not aware of the potential of
granite stone as its use in the form of polished slabs/tiles, he may choose to exploit the granite quarry by setting up a stone crushing
unit which will produce stone jelly to be used as a raw material for say, lying of road, preparing concrete mix e.tc. Even if the
entrepreneur is aware of the potential of granite stone, if he is not mentally prepared to venture into a high tech project for the
production of polished granite slabs/tiles which can have very good export potential, he may settle for a low tech stone crushing
project, producing jelly. He may be even satisfied with the return from the stone crushing unit through setting up an unit for
production of polished granite slabs/tiles will maximize the economic growth of the country as a whole by earning valuable foreign
exchange in view of its export potential.

Management appraisal – management is the most important factor that can either make a project a success or a failure. A
good project at the hands of a poor management may fail while a not so good project at the hands of an effective management may
succeed. Banks and financial institutions that lend money for financing projects lay more emphasis on management appraisal.
Institutions look at the capacity of the project to repay the loan along with interest within the stipulated period of time and also they
observe the willingness of the borrower to repay the loan. While the capacity to repay is assessed by technical, commercial and
financial appraisal the willingness to repay is assessed by way of management appraisal. While other appraisal techniques are
quantitative and objective in nature, management appraisal is purely qualitative and subjective in nature. Management appraisal
depends upon the constitution of the enterprise. The partnership firms, the management appraisal shall be done on the managing
partners of the firm. Mutual understanding and trust among the partner is a key factor for the success of an enterprise. Persons, who
maintained a cordial, long term relationship in the past either in business or in other areas, make good partners. Persons who join
together for the first time with sole intention of promoting a new project are often found to lack in mutual understanding and this
will slow up shortly after the project has taken shape, or at times , even during the implementation stage of the project itself. In
private limited companies, it will be the managing direction/executives directors who are to be apprised. The affairs of closely held
public limited companies are mostly looked after by the promoter directors. Public limited companies, the management appraisal
shall be done on the directors who are in the board of the company, on the chief executive officer of the company and also on key
functional managers. Appraisal of chief executive officer carries more importance since he is the king- pin of a company. The
importance of management appraisal is being increasingly felt now days in view of the growing number of units that have become
sick due to mismanagement. Management appraisal is concerned with the appraisal of human qualities.
Project Planning , Analysis and Management 24