Samara University

College of Business and Economics

Department of Management

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 Course information

Course Name Project Management

Course code MGMT4191
Credit hour 3 contact hours/week
Class year 3rd year and 1st Semester
Target Group 3rd Year Marketing Management
Students

Delivered by
Getu Eshetu (Assistant Professor)

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Course Description
This course is designed to equip students with
the:
knowledge
skills
attitudes required to execute projects effectively
and efficiently.

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Expected learning outcomes
At the end of the course, students should able to:

• Know basic concepts of project and project management

• Understand sources of project ideas and project identification,

• Explain feasibility study from different analytical perspective,conduct project appraisals and
make documentation of it.

• Appreciate project implementation, controlling & evaluation techniques, and

• Know mechanisms of project financing

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Assessment Mechanisms
Assessment type weight
1. Test -1 15%
2. Test-2 15%
3. Individual Assignment 10%
4. Group Assignment 10%
5. Final exam 50%
Total 100%

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“Trying to Manage a project without project
management is like trying to play a football
game without a game plan”

Katherine Tate
 Chapter One

Overview of Project Management

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Definition of project
• A project is a temporary piece of work with a finite starting and ending
date undertaken to create a unique product or service.

• PMBOK (Project Management Body of Knowledge) defines project as a

temporary endeavor undertaken to create a unique product or
service. Temporary means that every project has a definite end, and
Unique means that the product or service is different from all similar
products or services.

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Definition of project cont’d
• A collection of linked activities, carried out in organized manner, with
clearly defined start point and end point to achieve some specific results.

• Project is a temporary endeavor involving a connected sequence of

activities and a range of resources, which is designed to achieve a specific
and unique outcome, which operates within time, scope, cost and quality
constraints and which is often used to introduce change.

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Examples of project
Developing a new product or service

 Constructing a building or facility

Renovating the kitchen

Designing a new transportation vehicle

Acquiring a new or modified data system

Organizing a meeting, conference, workshop

 Implementing a new business process and the like

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 What is Project Management?
Definition
• PMBOK defines project management as the application of knowledge, skill, tool
and techniques to project activities in order to meet stakeholder’s needs and
expectations from a project.

• Project management is accomplished through the application and integration of

the project management processes of initiating, planning, executing,
monitoring and controlling, and closing.

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Project Management definition cont’d

• Project management is the planning, scheduling, and controlling of the

project activities to meet project objectives.

• PM is concerned with the overall planning and co-ordination of a project

from inception to completion aimed at meeting the client’s requirements
and ensuring completion on time, within cost and to the required quality
standards.

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 Project characteristics

• A project is not normal day to day activity undertaken by organization

rather it is specific, non-routine activity of varying time frame and
impact viability of the business in the long run. A typical project has
following characteristics:

• Despite differences in project definition, the following are some

characteristics usually common to all projects.
 Project characteristics cont’d
• Temporary- a project is a one-time ,once off activity ,never to be
repeated exactly that same way again. This means that a project is
done only one time and terminated after project requirements are met.
If it is repetitive, it’s not a project. In general, project has definite start
and finish.
• Unique- product/service is different in some distinguishing way. No
two projects are similar which means every project in unique in terms
of objectives, resource requirements, standard, quality, performance,
cost ,scope etc
 Project characteristics cont’d
• Customer-specific: Projects are not ready-made rather they are made ready. Projects are driven
by customers demand or requirements.

• Flexibility: Projects are subjected to change mostly in its initial stages. Every project have a
room for change and inherently flexible in the early stages of its life cycle.

• Team Spirit: Team spirit is required to get the project completed because project constitutes
different members having different characteristics from various disciplines.

• Risk and Uncertainty: the project is generally based on forecasting. So, risk and uncertainty are
always associated projects. Well planned and managed projects may have lesser degree of risk
and uncertainly than ill-planned and poorly managed projects.
 Defining project Management
Project management is application of knowledge, skills, tools, and techniques to
project activities in order to meet the requirements the particular project.

Project management is accomplished through the application and integration of

the project management processes of initiating, planning, executing, monitoring
and controlling, and closing

PM is concerned with the overall planning and co-ordination of a project from
inception to completion aimed at meeting the client’s requirements and ensuring
completion on time, within cost and to the required quality standards.
 Project Management definition cont’d
• Project management is the practice of initiating, planning,
executing, controlling, and closing t he work of a team to
achieve specific goals and meet specific success criteria at the
specified time. The primary challenge of project
management is to achieve all of the project goals within the
given constraints.
 Project , Program and plan

• Compare and contrast

project and program

Project and plan

 Project versus program
• The Project Management Institute (PMI) defines a project “as a
temporary effort to create value through unique products, services,
and processes.”

• The Project Management Institute (PMI) defines a program “as a

group of related projects managed in a coordinated manner to obtain
benefits not available from managing them individually.”
 Project versus program cont’d
• Example of project and program:
project to provide clean water solutions to a specific community.

program to improve living conditions in underprivileged

communities across the world by undertaking multiple
projects, including clean water initiatives, healthcare support,
and education programs.
 Project versus program (differences)
Project program
• Short-term, defined start and end • Long-term, may span several years
dates • programs focus on desired outcomes
• Projects focus on desired results or or benefits.
outputs • Realize long-term strategic benefits
• Achieve specific project goals and and value
deliverables • Covers multiple projects within the
• Limited to a single project program
• Allocates resources for a specific • Allocates resources across multiple
project projects
• Facilitates communication within the • Ensures communication in various
project team project teams
 Project versus program (similarities)
Both projects and programs serve to fulfill the objectives of an organization.

Both require careful planning and resource allocation.

Both require efficient management to ensure success.

Both involve stakeholders and their interests.

Both bring change or add value to the organization.

Both consume resources and etc.

 CHAPTER -2 PROJECT LIFE CYCLE

 What is project life cycle?

 What are the stages in the project life cycle according

to PMBOK?

 What are the international project life cycle models?

 Project Life Cycle Cont’d
• All projects follow a work pattern known as a project life cycle. A project life cycle decides
the way the project will deliver the deliverable.

• To put it simply, a project life cycle is the project progression through each step from
beginning to end.

• The number of cycles of stages and their order may fluctuate based on the organization and
the type of project.

• The project life cycle describes the procedures for managing a project from start to finish.

• Phases are important in planning a project since they provide a framework for budgeting,
manpower allocation, scheduling project milestones ,project reviews etc.
 Stages of the Project Life Cycle
• According to the PMBOK Guide, a project life cycle has five
stages:
Project Initiation Phase
Project Planning Phase
Execution Phase
Monitoring and Control Phase
Project Closeout Phase
 Project Initiation Phase
The first stage where you figure out the ‘why’ of the project’s
existence.
 You map out the project’s objective

Scope is defined during this phase

Feasibility studies are made in order to identify if there is a business

need and justification to pursue the project
 forming project teams and assign responsibilities.
 Project Initiation Phase cont’d
This is the phase that the project team is formed , responsibilities are

assigned and the project manager is identified

tasks are identified ,necessary resources identified, and stakeholders

identified.

 The key deliverable of this stage is the project charter.

 Project Planning Phase
• One of the largest and most important phases of every project.
• At this phase the project manager will begin to develop different project plans:
o Communication Plan (How will you communicate to your team, to your
stakeholders?)
o Risk Plan (How will risks be documented how will they be escalated?)
o Develop a WBS - Work Break Down Structure A work break down structure is key
because it breaks down the work into manageable work activities and/or tasks.
o Create Performance measurement baselines
o Develop Budget plan
o Resource plan
o Quality plan is developed to maintain proper standards throughout project
o a project plan is created outlining the activities, tasks, dependencies and
timeframes
o Procurement plan
 Project Execution Phase
• This phase is where the work outlined in the project plan is performed.

• This phase typically requires the most amount of time since the majority of the
work is done in this timeframe.

• You’ll hold meetings, send out status reports, and ensure that the project
runs smoothly.
 Project execution stage cont’d
• important activities in this phase are:
Communicating with stakeholders/prepare project status report
Reviewing progress
Monitoring the project
Controlling quality
Managing changes
Managing and conflict resolution
Leading and motivating and etc
Archive all project assets
Create and document lessons learned
 Monitoring and Control Phase
• The phase where results derived from your new process or product
are compared to the metrics you outlined in your performance plan.

• Monitoring & Control runs alongside the Execution phase and is

focused on monitoring the project’s progress.

• Determine variances and identify if they warrant corrective action or

change
 Project Closure Phase
• This is the final phase of the project life cycle
• Develop closure procedures
• Document final performance reporting
• Handoff completed product, process or code.
• Release resources
• Complete contract closures
• Receive all signoffs that work is completed as per requirements.
• Index and archive all project assets
• Create and document lessons learned
• Celebrate project success!
 Project Life Cycle Models
• Due to the complex nature and diversity of projects, there is no
agreement about the life cycle of projects.

• However, for life cycle of project to be understandable, the two

common project cycle referred as:
1. The Baum(World Bank) Project Cycle model (1978)
2. The UNIDO Project Cycle (1991)
 The Baum(World Bank) Project Cycle
• The Baum cycle- primarily reflects the series of activities and
procedures to the development of investment
projects(development projects) to be financed by the World
Bank.
• The Project , in the Baum Cycle, constitute six distinctive phases-
1. Identification
2. Preparation
3. Appraisal
4. Negotiation
5. Implementation & Supervision
6. Evaluation
 Identification stage
• Involve both the bank & borrower in selection of suitable
projects that support the national and sectorial development
strategies.
• The task of identifying and proposing projects for World Bank
financing lies mainly with borrowing governments
• Project must also pass a priorities test –project contributing
largely to the development potential of the borrowing country
is prioritized.
 Preparation stage
• With the advice and financial assistance from the Bank, the
borrower conducts feasibility study and prepare detailed project
documentation.

• The borrowing country is responsible for examining the technical,

economic, social, and environmental aspects of the project.
 Appraisal stage
The Bank is solely responsible for project appraisal.

 Bank staff review the work done during identification and

preparation, often spending three to four weeks in the client country.

The bank assess the economic, financial, technical, institutional,

environmental and social aspects of the project.

Lays the foundations for project implementation & evaluation

 Appraisal stage cont’d
• During appraisal process:
The project may be extensively modified or redesigned
An appraisal report is drafted by the bank outlying the
findings of the appraisal and making recommendation for
the terms and conditions of the loan

• The Bank appraisal report forms the basis for negotiations

with the borrower.
 Negotiation stage
• Involves discussion between bank & borrower on measures needed
to ensure project success
• Both sides come to an agreement on the terms and conditions of
the loan.
• The agreement reached would be converted into legal obligation
• When the Bank and borrower agree on terms of loan or credit, the
project is presented to the Bank’s Board of executive directors for
approval.
 Implementation & Supervision
• Project implementation is the responsibility of the borrowing
country, while the Bank is responsible for supervision

• Supervision by the bank:-

Conducted based on the progress report & periodic field visits

Intended to ensure proper execution of the project by identifying &

correcting implementation problems
 Implementation & Supervision stage cont’d
ensure that the proceeds of any loan are used only for the
purposes for which the loan was granted

As final step in supervision, the government prepares a

completion report on a project at the end of disbursement
period.
 Evaluation stage
• Follows the final disbursement of bank funds

 The banks independent evaluation, the Operations Evaluation Department (OED) conducts
an audit to measure project outcomes against the original objectives.

 The borrower would be asked to comment the project audit

 The project audit reports are submitted to the executive directors and the borrower

• This ex post evaluation provides lessons from experience which would be incorporated in the
identification, preparation & appraisal of subsequent projects.
 The UNIDO Project Cycle
• The development of an Industrial Project can be shown in
UNIDO project cycle comprising three distinctive phases
I. Pre investment Phase
II. Investment Phase
III. Operation Phase
 Pre Investment Phase
• Identification of investment opportunities (Opportunity studies)

• Analysis of project alternatives, preliminary selection and

project preparation(Pre-feasibility & Feasibility study)

• Project Appraisal & Investment decision( Appraisal report)

 I -Identification(Opportunity Studies)
• It is the starting point in series of investment related activities

• To generate information on newly identified viable investment

opportunities, the sector (macro economic) and the enterprise
(micro economic) approach to project identification will be
taken.
 II- Pre-Feasibility Study

• A preliminary selection stage of project on the basis of :

 Availability of an adequate market
 Project growth potential
Demand and supply factors
Social and environmental considerations
 II- Pre-Feasibility Study cont’d
• Objective of pre-feasibility study are to determine whether:
 All project alternatives have been examined
 A detailed analysis through feasibility study is required
 The investment opportunity is viable or not
 The environmental situation and the potential impact is inline with the national standards
Pre-feasibility is an intermediate stage between opportunity/problem identification and a
detailed feasibility study.
N.B
If the opportunity study (problem identification stage) is well-prepared and comprehensive
enough, the pre-feasibility stage could by-pass and hence, it is not always necessary to
undertake the pre-feasibility study.
 III-Feasibility study
• Feasibility study provides a comprehensive review of all aspects
of the project and lays the foundation for implementing the
project and evaluating it when completed.

• The commercial, technical, financial, economic & environmental

dimensions of a project should be defined & critically examined

• Although feasibility studies are similar in content to the

prefeasibility, it worked out with greatest accuracy and detail.
 IV-Appraisal
• Once feasibility is completed, various parties involved in the
project will carry out their own/independent appraisal of
Investment project.

• Detail evaluation of project in order to determine whether to

proceed to investment or not.
 INVESTMENT PHASE
• The investment phase includes project activities such as
Establishing the legal, financial & organizational basis for
implementation of projects

Technology acquisition and transfer

Detailed engineering design & contracting

Acquisition of land, construction work and installation

Preproduction marketing, Recruitment & Training of personnel

Plant commissioning & Start Up

 OPERATION PHASE
• Involves day to day operation of the completed project

• is expected to yield results which meet the original objectives

for which the project had been conceived, formulated and
implemented.
 DPSA'S PROJECT CYCLE
• According to the Guidelines to Project Planning in Ethiopia
(1990) of Development Project Studies Authority (DEPSA), a
project cycle comprises three major phase .
1. Pre-investment
2. Investment and
3. Operation
 DPSA'S PROJECT CYCLE CONT’D
• Each of these three phases may be divided into stages. The
guideline has divided the cycle into 6 stages.
1) pre-investment phase (identification, preparation and
appraisal/decision)
2) Investment phase (implementation )
3) Operation phase (operation, ex-post evaluation)
 Project management knowledge Areas

1. Project Integration Management

• What holds a project together?

• activities to identify, define, combine, unify, and coordinate the

various processes and project management activities.

• knowledge area that contains the tasks that withhold the overall
project together and integrates the project into a unified whole.
 Project Management Knowledge Areas Cont’d
2. Project Scope Management
• ensuring that the project includes all the work required, and only
the work required, to complete the project successfully.
3. Project Schedule Management
• managing the timely completion of the project.
• It involves:
 defining activities
 Sequencing activities
 estimating activity duration
 planning schedule
 developing schedule
 controlling schedule
Project Management Knowledge Areas Cont’d
4. Project Cost Management
• Project cost management is the process that is concerned with
planning and controlling the budget of the project

• Includes planning, estimating, budgeting, financing, funding,

managing, and controlling costs so that the project can be
completed within the approved budget.

• It’s all about handling the project’s financial requirements.

Project Management Knowledge Areas Cont’d

5. Project Quality Management

• determining quality policies, objectives, and responsibilities so that the
project will satisfy the needs for which it was undertaken.

• Contains:
Plan quality management
Manage Quality
Control Quality
 Project management knowledge Areas cont’d
6. Project Resource Management
• area about what resources (people, equipment, facilities,
funding) are required to complete the project at hand and then
organize a team to execute the work involved.

• Identifying resources needs, planning for resources, acquiring

resources, developing and managing team, and controlling
project resources.
 Project management knowledge Areas cont’d
7. Project Risk Management

• Conducting risk management planning, identification, analysis, response planning, and controlling risk on a
project.

• Contains activities like:

 Identifying risks
 Performing qualitative risk analysis

 Perform quantitative risk analysis

 Plan risk responses
 Implement risk responses
 Monitor risks
 Project management knowledge Areas cont’d
8. Project Communications Management
• ensuring timely and appropriate planning, collection, creation,
distribution, storage, retrieval, management, control, monitoring,
and the ultimate disposition of project information.
 Project management knowledge Areas cont’d
9. Project Procurement Management
• purchasing or acquiring products, services, or results needed
from outside the project team.

• Processes in this area include procurement planning,

solicitation, source selection, contract administration, and
contract closeout.
 Project management knowledge Areas cont’d
10. Project Stakeholder Management

• Identifying all people or organizations impacted by the project,

analyzing stakeholder expectations and impact on the project,

and developing appropriate management strategies for

effectively engaging stakeholders in project decisions and

execution.
CHAPTER -3 PROJECT IDENTIFICATION

Outline

Project identification

Sources of Project Ideas

 Project Identification : Meaning

• Project identification-is the starting-point in a series of activities in

project life.

• It involves the conceiving of ideas or intentions to set up a project.

• Project ideas are normally initiated by a perceived need (PROBLEM or

OPPORTUNITY) in an organization and converted into a formal project
proposal.
 Project Identification : Meaning …

• These ideas are then transformed into a project.

• The major focus in this step is:

 Finding Project Ideas or identifying needs or
demands for projects.

• The process of identifying a candidate idea for

developing into a project is called Project Identification.
 Sources of project ideas (Where project ideas are Born?)

• Project ideas are generated through different sources.

• The search for promising project ideas is the first step

towards establishing a successful project/business.

• In general, one can distinguish two levels where project ideas

are born.

• These are the macro-level & the micro-level

 Sources of project ideas…
Macro-level
At the macro-level, project ideas emerge from:
Policies: National policies & priorities
Plans and Strategies: National, sectorial, sub-sectorial or regional
plans and strategies.
Studies and publications
Constraints in the development process
Government decision to correct social and regional inequalities
A possible external threat
Unusual event such as droughts, floods, earthquakes, hostilities, etc.
Multilateral or bilateral development agencies and etc.
 Sources of project ideas…
Micro-Level project Ideas
 Demand or needs: The identification of unsatisfied demand or needs

 Unused Resources

 The initiative of private or public enterprises in response to incentives

provided by the government

 The necessity to complement or expand investments previously

undertaken.
 Preliminary Screening of Project Ideas
• Based on the Information Collected, it possible to develop a long List
of Project Ideas.
 However, some kind of preliminary filtration or screening
would be required to eliminate project ideas which prima facie
are not promising (Chandra, 2003)
• For this purpose, among others, the following aspects may be looked
into project ideas:
Compatibility with the organizational goal
Consistency with Government Priorities
Availability of Inputs
Adequacy of the Market
Reasonableness of Cost
Acceptability of Risk Level
Sustainability of the project and etc.
 Introduction to Feasibility Study

• Once project ideas have been identified the process of project

preparation starts.

• Project preparation must cover the full range of market analysis,

technical analysis, institutional, financial analysis, socio-economic
analysis, environmental analysis, organization and management
analysis.
 Feasibility Study…
• A Feasibility Study- is an analysis of the viability of an idea through a
disciplined and documented process of thinking through the idea from
its logical beginning to its logical end.

• The purpose of feasibility study is to provide stakeholders with the

basis for deciding whether or not to proceed with the project and for
choosing the most desirable options.
 Feasibility Study…
• It involves generally two steps: Pre-feasibility and feasibility study
• Pre-feasibility Study:
 Whether the project is prima facie worthwhile to justify a feasibility study
and hence warrant an in-depth investigation.
Pre-feasibility study is a process by which one obtains a complete picture
about the project being undertaken without really arriving at a detailed
feasibility study.
The information collected through this exercise can be used for preliminary
evaluation and screening of projects.
 Feasibility Study…
• Feasibility Study:
This stage involves comprehensive and systematic review of all aspects
of the project in order that decision can be made as to whether to
proceed.
Feasibility Study- provides an Investigating function that helps answer “Should we
proceed with the proposed project idea? Is it a viable project idea?”

A Feasibility Study - Should be conducted to determine the viability of an idea

BEFORE proceeding with the Investment Decision.
 Feasibility Study…

• Feasibility Studies can be undertaken by any type of business,

project or team and they are a critical part of the Project Life
Cycle.

• In other words, if you are unsure whether your solution will

deliver the outcome you want, then a Project Feasibility
Study will help gain that clarity.
 Feasibility Study…
• The outcome of the Feasibility Study is a confirmed solution for
implementation.
• A feasibility study is conducted to assist decision-makers in determining
whether or not to implement a particular project or program.
• When a business is considering a new operation or the launch of a new
product, the feasibility study is a logical tool to employ before any
resources are invested in the new project.
• A feasibility study is not a business plan, but serves as a foundation for
developing your business plan.
 Why do Project Preparation(Feasibility Study?)
To find out if a proposed project idea can be done i.e. ...is it
possible? , ...is it justified?
To provide quality information for decision making- a “go/no-
go” decision.
Help in securing funding from lending institutions and other
monetary sources
In other words, if you are unsure whether your solution will
deliver the outcome you want, then a Project Feasibility Study
will help gain that clarity.
 Project Feasibility study

Feasibility Process
Identify Initiate Define scope,
problem or feasibility identify constraints
opportunity study and objectives

Make Evaluate Carry out

recommendation alternatives Feasibility study

Accept project
Reject project
Delay project
Refocus project
Outsource project
 Components of Feasibility Study
A feasibility study contains five major components namely:
• Marketing feasibility study
• Raw Materials & Supplies feasibility Study
• Schedule feasibility
• Location feasibility
• Technical feasibility study
• Financial feasibility study
 Components of Feasibility Study…

• Economic feasibility study

• Management and organizational feasibility
• Environmental feasibility study
• Political feasibility
• Legal feasibility
 Marketing feasibility study
• Indicates the demand potential of the output of the project

• Market analysis should address the following questions:

is the product for domestic or export consumption?
is the market large enough to absorb the new product without
affecting the price?
what share of the total market will the proposed product have?
what marketing strategies and distribution channels are required?
 Marketing feasibility study …
In general, market feasibility study involves:

• Description of the Industry

• Current market Analysis

• Level of competition

• Anticipated Future Market Potential

• Potential Buyers and Sources of Revenues

• Demand forecasting/Sales Projections

Raw Materials & Supplies feasibility Study

• To identify and describe the different materials and

inputs required for the project,

• To analyze and describe their availability and supply,

and

• To estimate cost of materials and supplies

 Scheduling Feasibility
• This assessment is the most important for project
success; after all, a project will fail if not completed on
time.

• In scheduling feasibility, an organization estimates

how much time the project will take to complete.
 Location Feasibility/Analysis
• To identify locations suitable for the industrial project under
consideration.

• Location-refers to a fairly wide geographical area like a city ,

an industrial zone coverage of a project, within which several
alternative sites can be considered.
 Location Feasibility/Analysis …
• Key factors for the choice of location of a project:
Proximity to raw materials/markets(Resource/Market
Orientation)
Availability of infrastructural Service
Labor situation- Availability , Prevailing labor rate,
Labor productivity, literacy..
Socio-economic policies, incentives and restrictions and
government plans and policies
Natural environment, geophysical conditions and
project requirements
Ecological impact of the project, environmental impact
assessment and etc.
 Technical Feasibility Study
• Technical analysis represents study of the project to evaluate technical and
engineering aspects when a project is being examined and formulated.

• It includes:
 manufacturing Process
 Technical Arrangements
 Materials and Inputs
 Product Mix
 Plant capacity
 Location and site
 Machineries and equipment
 Structures and Civil Works
 Environmental Aspects
 Project Charts and Layouts
 Financial Feasibility Study
• The objective of the analysis is to determine the financial viability of
the project.

• Financial viability can be judged on the following parameters:

Total estimated cost of the project

Financing of the project in terms of its capital structure and debt equity ratio.

Projected cash flow and profitability

 Financial Feasibility Study …
The important investment criteria are classified into
two
1) Non-discounting Criteria
a) Payback period
b) Accounting rate of return
2) Discounting criteria include:
a) Net present value
b) Profitability Index/Benefit cost ratio
c) Internal rate of return
 Non-discounting Criteria
• Under non-discounted cash flow techniques, future cash flows are not
discounted to arrive at their present value.

• The following two techniques are classified under the head of non-
discounted cash flow techniques:
1. Payback period
2. Accounting rate of return
 Payback period
• One of the simplest investment appraisal techniques is
the payback period.
• The payback period is the number of years required to
recover the initial investment or the time it takes for
an investment to repay the initial outlay of
capital.
 Payback period…
If Cash flows are even/cash inflows are uniform, then year of payback
= Initial Investment
Cash flow per year
If cash inflows are uneven, it is necessary to calculate the cumulative net
cash flow for each period and then use the following formula:

x 12 months
Where:
A-is the last period with a negative cumulative cash flow;
B- is the total value of cumulative cash flow at the end of the
period A;
C- is the total cash flow during the year of final recovery.
 Payback period…
Decision Rule: Select project with the shortest payback
period

Payback Period Example

The original investment is £600,000, and the net income is £75,000

per year for the next 10 years, the payback is £600,000/£75,000 =
8 years).
 Payback period…
• Suppose a project with initial cash investment of $1,000,000 with a
cash flow pattern from 1 to 5 years 120,000.00, 150,000.00,
300,000.00, 500,000.00 and 500,000.00.

• Find out the exact payback period. Ans. 3.86 years

 Payback period…
• XYZ Inc. is considering buying a machine costing $100,000. There are two
options Machine A and Machine B. Machine A will generate revenue of $
50,000, $ 50,000 & $ 20,000 in year 1, year 2 & year 3 respectively while
Machine B will generate revenue of $ 30,000, $ 40,000 & $ 60,000 in year 1,
year 2 & year 3 respectively.
Which investment option would you recommend to XYZ Inc.?
The payback period is 2 years & 2.5 years for machine A & machine B,
respectively. According to the payback period method, machine A will be given
preference.
 Accounting Rate of Return Method

The average accounting rate of return is the

simplest investment appraisal technique.

It is a simple ratio of average net income to

average net investment expressed in percentage.
Accounting Rate of Return Method
ARR – Example 1
• XYZ Company is looking to invest in some new machinery to replace its
current malfunctioning one. The new machine, which costs $420,000,
would increase annual revenue by $200,000 and annual expenses by
$50,000. The machine is estimated to have a useful life of 12 years and zero
salvage value. Calculate ARR.

(answer 54.76%) which means that for every dollar invested, the investment
will return a profit of about 54.76 cents.
ARR – Example 1

• XYZ Company is considering investing in a project that

requires an initial investment of $100,000 for some
machinery. There will be net inflows of $20,000 for the first
two years, $10,000 in years three and four, and $30,000 in
year five. Finally, the machine has a salvage value of $25,000.
Find ARR.
Decision Rule
• In terms of decision making, if the ARR is equal to or
greater than a company’s required rate of return, the
project is acceptable because the company will earn at least
the required rate of return.
• If the ARR is less than the required rate of return, the
project should be rejected. Therefore, the higher the ARR,
the more profitable the company will become.
 Exercise

Which project should be preferred according payback period and

ARR technique?
 Discounted Cash Flow Techniques

• Discounted cash flow (DCF) techniques calculate the present value of

cash flows to be received in the future. The following are classified
under discounted cash flow techniques:
1. Net present value
2. Internal rate of return
3. Benefit Cost Ratio/Profitability index
 Discounted Cash Flow Techniques…
• Discounted cash flow (DCF) techniques calculate the present value
of cash flows to be received in the future. The following are
classified under discounted cash flow techniques:
[Link] present value
[Link] rate of return
[Link] Cost Ratio/Profitability index
 Net present value
• It is the most popular method of investment
appraisal. Net present value is the sum of discounted
future cash inflows & outflows related to the project.
• Net present value or NPV is a very well-known
technique for analysis in the arena of finance.
• Net present value is equal to the present value of all
the future cash flows of a project less the project’s
initial outlay.
 Net present value…
• Future Cash Flows: Future cash flows are the expected cash flow to be received by
the investor on the proposed investment.
• Discount Rate: It is the highest rate of return that the investor can earn by
investing the same money in some other investment alternative. In other words, a
discount rate is the opportunity cost of capital which means the cost of
compromising the other opportunity.
• Initial Investment: The initial investment is the cash outflow at the beginning of
the project, like the cost of machinery, etc.
 Net present value…

• Suppose you bought machinery worth 2 Million

Dollars, and it will fetch 0.5 Million Dollars every
year for 6 Years, and there will be no scrap value for
the machine. What should you do? Invest or Not?
Cash flows are discounted by 14%
 Net present value…
Discount Factor: Present
Cash Flow Year Amt
(1/1+14%)^n Value
C1 1 5,00,000 1.14 4,38,596
C2 2 5,00,000 1.3 3,84,734
C3 3 5,00,000 1.48 3,37,486
C4 4 5,00,000 1.69 2,96,040
C5 5 5,00,000 1.93 2,59,684
C6 6 5,00,000 2.19 2,27,793
Present Value of Future Cash Flows
19,44,334

Initial Investment
20,00,000

Project Not Worth

-55,666
 Internal Rate of Return

Internal Rate of Return – calculates the discount rate

that gives the project an NPV of $0. If the IRR is
greater than the required rate, the project is accepted.
IRR is given as % pa.
CF1 CF2
$0( NPV )   ......  IO
(1  IRR ) 1
(1  IRR ) 2

109
• Internal rate of return is the value of the discount rate for
which the NPV value is equal to 0.
• If the IRR is lower than the discount rate, then the investment
project is no longer effective because the total of updated
investment spends become higher than the discounted cash
flows and the NPV will have a negative value (NPV <0).
• For IRR higher than the discount rate, the investment project
is effective and the NPV is positive (NPV> 0).
110
 Profitability Index
• The profitability index (PI) is a measure of a project's or investment's
attractiveness.

• he PI is calculated by dividing the present value of future expected

cash flows by the initial investment amount in the project which is

• A PI greater than 1.0 is deemed as a good investment, with higher

values corresponding to more attractive projects.
 Profitability Index…
• Imagine that a company is considering two potential projects:
building a new factory, or expanding an existing one. The
factory expansion project is expected to cost $1 million and
generate cash flows of $200,000 per year for the next 5 years,
with a discount rate of 10%. The new factory project is
expected to cost $2 million and generate cash flows of
$300,000 per year for the next 5 years, also with a discount
rate of 10%.
• Which project should be accepted?
• The profitability index for the factory expansion project is
then calculated as:
PI = PV / Initial Investment
PI = $750,319 / $1,000,000
PI = 0.75 or 75%
• The profitability index for the new factory project is then
calculated as:
PI = PV / Initial Investment
PI = $1,125,479/ $2,000,000
PI = 0.56 or 56%
 Profitability Index…
• The factory expansion project has a higher profitability index,
meaning it is a more attractive investment.
• The company might decide to pursue this project instead of
the new factory project because it is expected to generate more
value per unit of investment.
• However, since both PIs are less than 1.0, the company
may end up forgoing either project in favor of a better
opportunity elsewhere.
 Economic Feasibility Study
• The term economic analysis and financial viability are not different for companies.

• However, from the national angle and from the view-point of the economy as a whole,
economic feasibility are not considered to be the same.

• Cost and benefits to the nation due to the proposed project are considered in the
economic feasibility test.

• Tax revenue, generation of employment, savings of foreign exchange and such other
factors, differentiate economic viability from financial viability.
 Environmental feasibility study
• The process of identifying, predicting, evaluating, and Communicating
the measures to be taken to reduce & control the biophysical, social, and
other environmental effects of proposed project prior to major decisions
being taken and commitments made.
• The objective of EIA is to ensure that proposed project is
environmentally sound
• A project may cause environmental pollution in various ways:
It may throw gaseous emissions
It may produce liquid and solid discharges
It may cause noise, heat and vibrations
 Environmental feasibility study…
The environmental aspects of projects have to be properly examined.
The key issues that need to be considered in this respect are:
What are the types of effluents and emissions generated
What needs to be done for proper disposal of effluents and
treatment of emissions
Will the project be able to secure all environmental clearances and
comply with all statutory requirements
 Political feasibility
• Political viability of the location/region/ country where the
project will be established is an important facets of feasibility
study.

• There are two types of politics to be considered:

1. Internal politics, which inevitably occur in all organizations
which manifest themselves in the opinions and attitudes of the
different stakeholders in these organizations.
 Political feasibility…
2. The second type of politics is external politics over which
neither the sponsor nor the project manager may have much
control.
Any project which has international ramifications is
potentially subject to disruption due to the national or
international political situation.
Thus regional and national political stability must be duly
studied before deciding project location.
 Legal Feasibility

• This assessment investigates whether any aspect of the

proposed project conflicts with legal requirements.
 CHAPTER FIVE

PROJECT IMPLEMENTATION,
MONITORING AND
EVLAUATION
 Project implementation

• Once a decision to go ahead has been made, a project

enters Investment/Implementation phase.
• Project implementation is the process whereby the projects inputs
are converted to project output.

• Putting into practice what was proposed in the project document

(i.e transforming the project proposal into actual project.
 Project implementation…

• Factors that lead to success of projects:

 political commitment
Simplicity of design
Careful preparation
Good management
Involvement of beneficiary /community
 Project implementation…

Factors and problems that lead to failure of projects:

 Financial problems
Management problems
Technical problems
Political problems
Poor scheduling of projects leading to delays
Misallocation of funds
Lack of accountability and transparency
 Project implementation…
Bureaucracy in decision making
Corruption
Weak monitoring systems
Natural calamities like earthquakes, landslides, flooding and etc
Lack of team work
Lack of incentives for implementers
Poor management of change
 Lack of effective engagement with stakeholders
 Lack of clear senior management and Ministerial ownership and leadership.
 Project Planning and Control
• A major portion of the planning effort entails determining the relationship of different tasks to each
other and then scheduling, monitoring and controlling these tasks in such a way that the project is
carried out efficiently and logically.

• Project implementation plan techniques and tools includes:

 Gantt chart
 Critical path method (CPM)
 Project Evaluation and Review Techniques (PERT)
 Logical framework analysis
 Simple format
 SWOT analysis and etc.
 Monitoring and Evaluation (M&E)

• Monitoring and Evaluation is the systematic collection

and analysis of information to enable managers and key
stakeholders to make informed decisions, maintain existing
practices, policies and principles and improve the
performance of their projects.
 Monitoring and Evaluation (M&E)…

1)Monitoring
• Systematic and continuous collection, analysis & use of information for management control & decision
making.

• Monitoring is a continuous, methodical process of data collection and information gathering

throughout the life of a project.

• The information collected can be used for regular evaluation of progress, so that adjustments can be
made while the work is going on.

• Monitoring is also used to mean the systematic 'tracking' of a particular condition, or set of conditions
to identify trends.
 Monitoring and Evaluation (M&E)…

2)Evaluation
• Evaluation is study to assess and value the achievement of projects
and generate lessons learned for future projects generally after
completion of project.

• It can be done at the begging, mid term, or at the end of the project.
 Reasons for carrying out project M& E

• Project managers and other stakeholders need to know to what extent their project is
meeting its objectives.

• M& E build greater transparency and accountability in terms of use of project resources.

• Information generated through M&E provides project staff with a clearer basis for
decision making.

• Lessons learned from project experience can be used to improve future project planning
and development.
 Project organization structure
• A project organization is a structure that facilitates the
coordination and implementation of project activities. Its main
reason is to create an environment that fosters interactions among
the team members with a minimum amount of disruptions, overlaps
and conflict.

• One of the important decisions of project management is the form

of organizational structure that will be used for the project.
 Project organization structure…

• Each project has its unique characteristics and the design of an

organizational structure should consider the organizational
environment, the project characteristics in which it will operate, and
the level of authority the project manager is given.
 Project organization structure…
1. Functional Organization Structure
• Functional organization is a Project Management
Structure that focuses on specialization and
departmentalization to achieve efficiency and
effectiveness.
• This structure is usually used in organizations with a
flat hierarchy, where the project team is formed of
different units or departments.
 Project organization structure…

• The benefit of this (PMO) project organizational structure is

that it allows more specialized employees to contribute to a
project without going through layers of management.
• In this structure, project managers usually don’t have a lot of
authority to obtain resources or to manage schedules and budgets.
 Project organization structure…
Functional project structure
Advantages of Functional Organization Structure

• It works well for small teams and small projects because the
function has full control over the team members and other
resources required.
• You can easily access the experts you need because they are in
the same functional area.
• It’s quick to get everyone together to resolve problems related to
the project.
 disadvantages of Functional Organization
Structure

• Work takes place in a silo, which might mean you don’t have
access to people outside your functional division.

• People on the project team might be more loyal to their

department or team manager than to their work on the project,
which can create conflicts.

• Maintaining a strategic focus can be harder.

 Projectized Organizational Structure

• A projectized or project-based organizational structure creates a

dedicated project division within an organization. The project
coordination operates vertically under this division.

• The project manager in this structure has total authority over the
project and can acquire resources needed to accomplish project
objectives from within or outside the parent organization.
 Projectized Organizational Structure…
• Personnel are specifically assigned to the project and
report directly to the project manager. This leads to
increased project loyalty.
• Complete line authority over project efforts affords the
project manager strong project controls and
centralized lines of communication. This leads to rapid
reaction time and improved responsiveness.
Advantages of Projectized Organizational
Structure
• Project teams develop a strong sense of project
identification and ownership, with deep loyalty efforts
to the project and a good understanding
Disadvantages of Projectized Organizational
Structure
• In fact, one major disadvantage of the project based
organization is the costly and inefficient use of
personnel
• limited opportunities exist for knowledge sharing
between projects, and that is a frequent complaint
among team members concerning the lack of career
continuity and opportunities for professional growth.
Disadvantages of Projectized Organizational
Structure…
• One disadvantage is duplication of resources, since scarce
resources must be duplicated on different projects.

• There can also be concerns about how to reallocate people and

resources when projects are completed.
Projectized Organizational Structure…
 Matrix Project Organization
• Matrix organizations are one of the most flexible project
management structures available.
• It can be more responsive than other types of project management
structures because it allows teams to quickly shift their focus when
necessary.
• It is also less costly than other types of project management
structures.
• Besides, they allow for greater employee involvement in decision-
making processes, resulting in better-quality decisions and higher
employee satisfaction.
Example of Matrix Project Organization
 Matrix Project Organization…

• However, Matrix organizations may be less efficient than other

structures because they require more communication between teams
and management.

• The conflict between projects is common because you might be

fighting for the same resources as another project.
 CHAPTER -SIX

SOCIAL COST BENEFIT

ANALYSIS (SCBA)
 What is SCBA?

• Social cost benefit analysis is an appraisal tool to evaluate a

project from the view point of the society as a whole.

• It refers to the analysis of the costs and/or the benefits that a

society may have to bear and/or get from the proposed project.

• Thus, we evaluate a project from the view point of the society

or economy as a whole, it is called SCBA.
 What is SCBA?
• It is a study of feasibility of a project in terms of its
total economic cost and total economic benefits.
• Social Cost Benefit Analysis (SCBA) is also referred as
Economic Analysis (EA).
• SCBA or EA is a feasibility study of a project from
the viewpoint of a society to evaluate whether a
proposed project will add benefit or cost to the
society.