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Project Analysis and

Management

by: Sintayehu K
 CONCEPT OF THE PROJECT
The term ‘project’ may be defined as a complex of
economic activities in which scarce resources are
committed in expectation of benefits that exceed the
costs of resources consumed.
It refers to an investment activity in which resources
are committed within a given time framework, to
create assets over an extended time in expectations of
benefits which exceeds the committed resources.
From the definition:
➢Projects require resources.
➢They are also expected to derive benefits.
➢A project can also be referred to as a non-repetitive
activity.
 CONCEPT OF THE PROJECT
A project is viewed as a conversion process.
(project involves a transformation of some
form of inputs into an output).
 CONCEPT OF THE PROJECT

Inputs represent want or need whereas

outputs represent satisfied need.

Constraints consist of factors such as

financial, legal, ethical, environmental,
time, and quality.

Mechanisms include people, knowledge

of expertise, capital, tools and
techniques, and technology.
CONT……
project program
:
✓Has specific •May not have specific area
Difference area/geographic unit •Has got general objectives
✓Is specific in •May not have specific
objectives/purpose target groups
✓Has specific targets •May not have clear and
groups detailed financial allocation
✓Has clearly determined •May not have specific time
and allocated fund of ending
✓Has specific life time

➢Has purpose/objectives
Similarities ➢Require input (financial, manpower, material, etc.)
➢Generate output (goods and/or services)
➢Operate over space and time
TYPES OF PROJECT /CAPITAL INVESTMENT/
The term capital refers to investments in fixed
assets.
Capital investments deal with the whole process of
identifying and analyzing which projects should be
pursued.
Capital investments (CI) may be classified into
physical assets, monetary assets, and intangible
assets.
CI- in physical assets include investments in
building, machinery, equipment, vehicles, and
computers.
CI- in monetary assets include investments in debt
or equity securities. Debt securities involve bonds,
notes, deposits etc whereas equity securities include
equity shares, options, warrants and the like.
 CONT…
Projects may also be classified:-
1. Cost Reduction (Replacement) Investments,

2. Revenue Expansion Projects, Or

3. Mandatory Investments
1. Replacement (cost reduction) investments aim at
replacing the worn-out equipment with new
equipment to reduce operating costs (material, labor
and/or overhead costs), increase the yield
(productivity), and/or improve quality.
 CONT….
2. An expansion (revenue) investment is meant to
increase the capacity to cater to a growing demand
in the form of ;
✓Entering new markets (market development),
✓Introducing new products to the existing
market (product development),
✓ Operating with the same products in the
existing markets (penetration), or
✓ Introducing the new product for new
market (diversification).
3. A mandatory investment is a capital expenditure
required to comply with statutory requirements,
such as pollution control, fire fighting, medical
dispensary and so on.
 CONT….
Projects may also be classified into
Development projects and
Business projects.
While Business (industrial) projects
aim at profit or value maximization of
the owners,
Development projects aim at reducing
poverty and are pursued by the
government or NGOs.
 THE IMPORTANCE OF PROJECT/CI
The importance of project as capital
expenditure decision stems from three inter –
related facts:
➢They have long-term effects
➢Irreversibility
A wrong capital investment decision
often cannot be reversed without incurring
a substantial loss.
➢Substantial outlays
Capital investments require substantial
outlays.
This is especially the case with
investments in advanced technology.
 PROJECT SUCCESS CRITERIA
To create a successful project, a project
manager must consider scope, time, and cost
and balance these three often-competing
goals:
Scope: What work will be done as part of the
project? What unique product, service, or
result does the customer or sponsor expect
from the project?
Time: How long should it take to complete
the project? What is the project’s schedule?
Cost: What should it cost to complete the
project? What is the project’s budget? What
resources are needed?
 PROJECT SUCCESS CRITERIA
Other people focus on the quadruple
constraint, which adds quality as a fourth
constraint.
Quality: How good does the quality of the
products or services need to be? What do we
need to do to satisfy the customer?

Scope/
quality

Time Cost
 PROJECT SUCCESS CRITERIA
Project will deem to be successful if it:
❖Delivers the outcome with an agreed upon
quality.
❖Does not overrun its end date.
❖Remains within budget (cost of resources).
 CONT……

Phases of capital budgeting

capital budgeting process is divided in to six

broad phases.
1. Planning
2. Analysis
3. Selection
4. Financing
5. Implementation
6. Review
CONT……
1. Planning
▪ Articulation of the firm’s broad investment strategy
▪ The generation and preliminary screening of project proposals
(ideas)
2. Analysis
• Detailed analysis of the project will be undertaken in terms of
marketing, technical, financial, economic, and ecological
aspects.
• It focuses on gathering, preparing, and summarizing relevant
information
3. Selection
• Addresses the question “Is the project viable?”
4. Financing
• Two sources of financing the projects- debt (loans, bonds etc) and
equity financing (common stock, preferred stock, retained
earnings etc.)
• The firm should decide on the optimal mix
5. Implementation
6. Review
 CONT……
Project cycle refers to the various stages through which project
planning proceeds from the inception to implementation
Above, we present one way of describing the project cycle.

In the following section we try to highlights two other approaches;

namely, the World Bank and United Nations Industrial Development
organizations (UNIDO).

1. Project life cycle – BAUM (World Bank)

Approach
involves five stages;
I. project identification,

II. project preparation,

III. project appraisal,

IV. project implementation, and

V. project evaluation.
CONT……
Evaluation Identification
/pre-feasibility/

Implementation Preparation
And /feasibility
monitoring analysis/

Appraisal
/decision/
 CONT……
1. Identification:
❖Pre-feasibility studies.
❖Project ideas may come from many sources.
❖Elimination of inferior alternatives (projects) from the
identified ones.
❖Selected projects will continue to be redefined and shaped
2. Preparation and analysis:
Feasibility study, is concerned with the detailed study
of all aspects of the projects.
3. Appraisal (critical review):
❖opportunity to reexamine every aspect of the project
plan
❖To decide on which alternatives are feasible and
sound project plan , based on the objective sets
 CONT……
4. Implementation and monitoring:
The tasks to be done during project implementation:
❖Breaking down the project into its component tasks
and activities;
❖Assignment of tasks and activities
❖Allocation and use of resources such as personnel,
finance, time and materials;
❖Coordination, monitoring and control of the
performance of the project team
5. Evaluation:
❖the whole project will be re-analyzed in order to
provide feedback
❖information which might be useful for future
interventions.
 CONT……
2. Project cycle- UNIDO approach

Project cycle involves three major phases. These are:

➢Pre-investment phase
➢Investment phase (Implementation phase)
➢Operation phase (operation and ex-post evaluation)
 CONT……
1. Pre-investment phase
Includes four major activities; project identification, pre–
selection, project preparation, and appraisal.
I. Project Identification / opportunity study/
opportunity studies can be categorized in to Area studies, Industry studies,
and Resource based studies.
Availability of resources
Future demand for goods, increasing population and increasing
purchasing power.
Import and export substitutions
Environmental impact
Success of similar projects elsewhere
Possible inter-linkage with other industries
Expansion through backward linkages (Backward integration) and
forward linkages (Forward integration)
Industrial policies of the government
General investment climate of the country
Export potentials
Availability and cost of production …Etc
 CONT……
ii. Pre-selection /pre-feasibility study/
involves the analysis of the following factors:

✓Investigation of all possible project alternatives

✓Ensure that the detailed analysis of the project is
justified.
✓In-depth investigation of critical areas of the
project
✓Examine the attractiveness (viability) of the
project
✓Investigate the stability of the environmental
situation at the location site

The above analyses are based on guess-estimated data.

 CONT……

iii. Preparation (feasibility study)

This stage provides all data, define, and critically
examine the commercial, technical, financial,
economic, and environmental aspects for each
projects.
..\..\UNIDO.docx
The above figure is interpreted as follows:
i. After opportunity studies, the project should be
reliable about 70% for implementation
ii. The project should be reliable about 80% for
implementation after pre- feasibility studies
iii. After feasibility studies, the project should be
about 90% reliable for implementation.
 CONT……

IV. Project Appraisal

✓After feasibility studies are completed, the
projects should be presented to the appraising
parties.
✓The appraisal of project is based on the
objectives set earlier, the expected risk, costs,
and gains.
✓If the objective of the appraiser is Return on
investment, the project is appraised on this
base.
 CONT……

2. Investment Phase
The investment phase, also called implementation
phase, includes the following activities:
✓Establish legal, financial and organizational basis
✓Technology acquisition and transfer
✓Detailed engineering, design, contracting, tending &
negotiations.
✓Acquisition of land, construction works, and
installations
✓Pre- production marketing, securing of supplies, and
setting up administration.
✓Recruitment, training, and placement of workers.
✓Plant commissioning and startup
CONT……
3. Operating phase
➢the project will go in to actual operation.
➢The operation involves producing the envisaged
goods, and sale to the target market, or renders the
envisaged service to the target market.
➢The project also requires evaluation, which deals
with the review of whether the project is being
implemented as per expectation.