Project planning and analysis

Project Planning and Analysis
Project Identification Analysis
Course Content:
 Conceptof Project
 Searchfor BusinessIdea
 ProjectIdentification
 ProjectPlanningFormulationandAnalysis
 ProjectScreeningandPresentationof ProjectsforDecision-Making
 Socio-economicConsiderationinProjectformulation
 Social infrastructure ProjectsforSustainable Development
 InvestmentOpportunities.
Concept and features of Project
 A Projectisa unique endeavortoproduce asetof deliverableswithinclearlyspecifiedtime,costandquality
constraints.
 Tryingto manage a ProjectwithoutProjectmanagementisliketryingtoplaya football game withoutagame
plan.
 Gillingerdefines“project”asthe whole complex of activitiesinvolvedinusingresourcestogainbenefits.
 Projectmanagementinstitute,USA definedprojectas“a systeminvolvingthe co-ordinationof anumberof
separate departmententitiesthroughoutorganization,inawayit mustbe completedwithprescribedschedules
and time constraints”.
 Projectisa unique processof a setof coordinatedandcontrolledactivitieswithstartandfinishdates,
undertakentoachieve anobjectiveconformingtospecificrequirements,includingconstraintsof time,cost,
qualityandresources.
 It isa plannedsetof activities
 It has scope
 It has time,cost,qualityandresource constraints.
 Featuresof Project
CHARACTERISTICS OF PROJECT
(1) Objectives :A projecthas a set of objectivesoramission.Once the objectivesare achievedthe projectistreatedas
completed.
(2) Life cycle : A projecthas a life cycle.The life cycle consistsof fivestagesi.e.conceptionstage,definitionstage,
planning&organizingstage,implementationstage andcommissioningstage.
(3) Uniqueness :Everyprojectisunique andnotwoprojectsare similar.Settingupacementplantand constructionof a
highwayare twodifferentprojectshavinguniquefeatures.
(4) TeamWork : Projectisa teamworkand it normallyconsistsof diverseareas.There willbe personnel specializedin
theirrespective areasandco-ordinationamongthe diverseareascallsforteamwork.
(5)Complexity :A projectisa complex setof activitiesrelatingtodiverseareas.
(6) Riskanduncertainty : Riskanduncertaintygohand inhand withproject.A risk-free,itonlymeansthatthe elementis
not apparentlyvisibleonthe surface andit will be hiddenunderneath.
(7) Customerspecificnature :A projectisalwayscustomerspecific.Itisthe customerwhodecidesuponthe productto
be producedor servicestobe offeredandhence itisthe responsibilityof anyorganizationtogofor projects/services
that are suitedtocustomerneeds.

(8) Change : Changesoccur throughoutthe life spanof a projectas a natural outcome of many environmental factors.
The changesmay vary fromminorchanges(whichmayhave verylittle impactonthe project),tomajorchanges(which
may have a bigimpact or evenmaychange the verynature of the project).
(9) Optimality:A projectisalwaysaimedatoptimumutilizationof resourcesforthe overall developmentof the
economy.
(10)Sub-contracting:A highlevel of workina projectisdone throughcontractors.The more the complexityof the
project,the more will be the extentof contracting.
(11) Unityin diversity :A projectisa complex setof thousandsof varieties.The varietiesare intermsof technology,
equipmentandmaterials,machineryandpeople,work,culture andothers.
Types of Project
 Motorway andexpressway.
 Metro, subwayandothermass transitsystems.
 Dams.
 Railwaynetworkandservice –both passengerandcargo.
 Powerplantsandother chargedutilities.
 Port and terminals.
 Airportsand terminals.
 Minesand natural resource explorations.
 Large newindustrial undertakings –[noexpansionandextensions.
 Large residentialandcommercial buildings.
Project Management
 Projectmanagementisanorganizedventure formanagingprojects,involvesscientificapplicationof modern
toolsand techniquesinplanning,financing,implementing,monitoring,controllingandcoordinatingunique
activitiesortaskproduce desirable outputsinaccordance withthe determinedobjectiveswithinthe constraints
of time andcost. ProjectManagementiscausingaplannedundertakingtohappen.
Role of Project Manager:
 Takesownershipof the whole project
 Is proactive notreactive
 Adequatelyplansthe project
 Is Authoritative(NOTAuthoritarian)
 Is Decisive
 Is a Good Communicator
 Manages bydata and facts not uniformedoptimism
 Leadsby example
 Has soundJudgement
 Is a Motivator
 Is Diplomatic
 Can Delegate
Project Identification
 Firststepin strategicplanningprocess.
 Identificationof anewprojectisa complex problem.Projectselectionprocessstartswiththe generationof
projectideas.Inorderto selectthe mostpromisingproject,the entrepreneurneedstogenerate afewideas
aboutthe possible projectone canundertake.The projectideasasaprocessof identificationof aprojectbegins

withan analytical surveyof the economy(alsoknownaspre-investmentsurveys).The surveysandstudieswill
give usideas.The processof projectselectionconsistsof followingstages:
- IdeaGeneration
- Environmental Appraisal
- Corporate Appraisal
- Scoutingforprojectideas
- Preliminaryscreening
- Projectratingindex
- Sourcesof positive NetPresentValue
- Entrepreneurqualities
Step-1 Project Idea Screening
Projectselectionprocessstartswiththe generationof aprojectidea.Ideasare basedontechnological breakthroughs
and mostof the projectideasare variantsof presentproductsor services.Tostimulate the flowof ideas,the following
are helpful:
1. SWOTAnalysis :- SWOT is an acronymfor strengths,weaknesses,opportunitiesandthreats.SWOTanalysis
representsconscious,deliberate andsystematiceffortbyan organizationtoidentifyopportunitiesthatcan be profitably
exploitedbyit.PeriodicSWOTanalysisfacilitatesthe generationof ideas.Operationalobjectivesof afirmmay be one or
more of the following:
 Cost reduction
 Productivityimprovement
 Increase incapacityutilization
 Improvementincontributionmargin
2. Fosteringa conducive climate :- To tap the creativityof people andtoharnesstheirentrepreneurial skills,aconducive
organizationclimate hastobe fostered.Twoconspicuousexamplesof organizationwhichhave beenexceptionally
successful intappingthe creativityof employeesare:
 The Bell TelephoneLaboratory:Ithas succeededinharnessingcreativitybyprovidinganunconstrained
environment
 3M Corporation:Ithas effectivelynurturedthe entrepreneurial skillsof itsemployeesassourcesof idea
generation.
The projectideascan be generatedfromvariousinternal andexternal sources.These are :-
 Knowledgeof market,products,services andpotentialcustomerchoice.
 Emergingtrendsindemandforparticularproduct.
 Scope for producingsubstituteproduct.
 Market survey& research.
 Making visitstotrade and exhibitions,GoingthroughProfessional magazines.
 Governmentguidelines&policy.
 Ideasgivenbythe experiencedpersonandbypersonal experience
3. Cleararticulation of objectives:A cleararticulationsandprioritizationof objectiveshelpsinchannelizingthe efforts
of employeesandprodsthemtothinkmore imaginatively.The operational objectivesof afirmmay be one or more of
the following:
 Cost reduction
 Productivityimprovement
 Increase incapacityutilization
 Improvementincontributionmargin
 Expansionintopromisingfields

Step-2 Environment Appraisal
 An entrepreneurora firmsystematicallyappraisethe environmentandassessitscompetitiveabilities.Forthe
purposesof monitoring,the businessenvironmentmaybe dividedintosix broadsectors.The keyelementsof
the environmentare asfollow:
1. Economic Sector
• State of the economy
• Overall rate of growth
• Cyclical fluctuations
• Inflationrate
• Growthrate of primary,secondaryandterritorysector
• Growthrate of worldeconomy
• Trade surplusanddeficits
• Balance of Payment
2. GovernmentSector
• Industrial policy
• Governmentprogramandprojects
• Tax structure
• EXIMpolicy
• Financingnorms
• Subsidiesincentivesandconcessions
• Monetarypolicy
3. Technological Sector
• Emergence of newtechnologies
• Accessto technical know-how,foreignaswell as indigenous
4. Socio-demographicSector
• Populationtrends
• Age shiftsinpopulation
• Income distribution
• Educational profile
• Employmentof women
• Attitudestowardconsumptionandinvestment
5. CompetitionSector
• Numberof firmsinthe industry andthe marketshare of the top few
• Degree of homogeneityanddifferentiationamongthe products
• Comparisonwithsubstitutesintermof qualityandprice
• Marketingpolicesandpractices,Entrybarrier

6. SupplierSector
• Availabilityandcostof raw material,energy,capital
Step-3 CorporateAppraisal
 A realisticappraisal of corporate strengthsandweaknessesisessentialforidentifyinginvestmentopportunities
whichcan be profitablyexploited.The broadareasof corporate appraisal andthe importantaspectsto be
consideredunderthemare asfollows:
1. Marketing and distribution:
 Market image
 Productline
 Market share
 Distributionnetwork
 Customerloyalty
 Marketingand distributioncosts
2. Production and Operations:
 Conditionandcapacityof plantand machinery
 Availabilityof rawmaterials,sub-assembliesandpower
 Degree of vertical integration
 Locational advantage
 Cost structure
3. Researchand Development
 Researchcapabilitiesof the firm
 Track record of newproductdevelopments
 Laboratories and testingfacilities
 Coordinationbetweenresearchandoperations
4. Corporate Resourcesand Personnel
 Corporate image
 Cloutwithgovernmentalandregulatoryagencies
 Dynamismof topmanagement
 Competence andcommitmentof employees
 State of industrial relations
5. Finance and Accounting:
 Financial leverage andborrowingcapacity
 Cost of capital
 Tax situation
 Relationswithshareholdersandcreditors
 Accountingandcontrol system
 Cash flowsandliquidity
Step- 4 Tools for identifying Investment opportunities
Most populartoolsthat are helpful inidentifyingpromisinginvestmentopportunitiesare:
1. PorterModel:Porter’sfive force model
2. Life cycle approach
3. Experience curve
1. Porter model: Profit Potential of Industries
Michael Porterhas arguedthat the profitpotential of anindustrydependsonthe combinedstrengthof the following
five basiccompetitive forces:
1. Threat of newentrants

2. Rivalryamongexistingfirms
3. Pressure fromsubstitute products
4. Bargainingpowerof buyers
5. Bargainingpowerof sellers.
2. Project Life cycle
Economistsbelieve thatmostproductsevolvethroughalife cycle whichhas4 stages:
1. Pioneeringstage:Technologyorproductisrelativelynew,Luredbypromisingprospects,manyentrepreneurs
enterthe field.Keenandchaoticcompetition.Onlyafew entrantsmaysurvive thisstage.Investmentinthis
stage may have a lowreturnand negative NPV.
2. RapidGrowth stage: Once the periodof chaotic developmentsisover,the rapidgrowthstage arrives.Thanksto
a relativelyorderlygrowth duringthisperiod,firmswhichsurvivethe intense competitionof the pioneering
stage,witnesssignificantexpansionintheirsalesandprofits.Investmentinthisstage islikelytoearna high
returnand generate positive NPV.
3. Maturity andStabilizationstage:Afterenjoyinganabove average rate of growth,the industryentersthe
maturityandstabilizationstage.Duringthisstage,whenthe industryismore orlessfullydeveloped,itsgrowth
rate iscomparable tothat of the economyasa whole.Investmentinthisstage mayearnaverage returnand is
NPV- neutral.

4. Decline stage:Withthe satiationof demand,encroachmentof new products,andchangesinconsumer
preferences,the industryeventuallyentersthe decline stage,relativetothe economyasa whole.Inthisstage,
whichmay continue indefinitely,the industrymaygrow slightlyduringprosperousperiods,stagnate during
normal periods,anddecline duringrecessionaryperiods.Investmentinthisstage mayearnmeagre returnsand
produce negative NPV.
3. The Experience Curve
 The experiencecurve isa useful tool forplanninginvestmentsaimedatreducingcoststo ensure longterm
survival andprofitabilityof the firm.
 It showshowthe cost per unitbehaveswithrespecttothe accumulatedvolume of production.
 In general,the costperunitdeclineswiththe accumulatedvolume of production.
 Factors that contribute todecline inunitcostwithrespecttothe accumulatedvolume of production:
1. Learningeffects:Withmore andmore of production, laborskillsimprove andproductivityincreases,leadingto
lowercosts.
2. Technological improvements:Increasedvolumemakesitpossible todeployimprovedproductiontechniques
and processesthatlowercosts.
3. Economiesof Scale:Asthe capacity increases, the costperunitdecreasesthisisdue toeconomiesof scale.
Step-5 Scouting for Project Ideas
 Good projectideasare the keyto successand are elusive.Soawide varietyof sourcesshouldbe tappedto
identifythem.Followingare some suggestionsinthisregard:
1. Analyze the performance of existingindustries
2. Examine the inputsandoutputsof variousindustries
3. Reviewimportsandexports

4. Studyplanoutlaysandgovernmental guidelines
5. Investigate local materialsandresources
6. Analyze economicandsocial trends
7. Studynewtechnological developments
8. Draw cluesfromconsumptionabroad
9. Explore the possibilityof revivingsickunits
10. Identifyunfulfilledpsychological needs
11. Attendtrade fairs,stimulate creativityforgeneratingnew productideas
Step-6 Preliminary Screening
 Preliminaryscreeningisrequiredtoeliminate ideasthatare not promising.Forthisfollowingaspectsare talked
about:
 Compatibilitywiththe promoter: The ideamustbe compatible withthe interest,personalityandresourcesof
the entrepreneur.Itshouldofferhimthe prospectof rapidgrowthandhighreturnon the investedcapital.
 ConsistencywithGovernmental Priorities:the projectideamustbe feasiblegiventhe national goalsand
governmental regulatoryframework.Itshouldnothave anyenvironmental effectscontrarytogovernment
regulations.Questionslike:willthere be anydifficultyinobtainingthe licenseforthe project?, Canthe foreign
exchange requirementsof the projectbe easilyaccommodated?Are tobe askedandansweredbefore selecting
any project.
 Availabilityofinputs: the resourcesandinputsrequiredforthe projectmustbe reasonablyassured.Following
questionsshouldbe answered:
- Are the capital requirementsof the projectwithinmanageable limits?
- Can the technical knowhowrequiredforthe projectbe obtained?
- Is the powersupplyforthe projectreasonablyobtainablefromexternalsourcesandcaptive powersources?
- Indianbusinessesinpasthave facedseveral problemslike shortageof raw material, power,foreignexchange
etc.but nowin recenttimesthe situationhasimprovedsince powergenerationhasincreasedsignificantly,
foreignexchange isnowavailable easily,suppliesof certainbasicindustrial raw materialshave been
augumentedsubstantially.
 Adequacy ofthe Market: The size of the presentmarketmustofferthe prospectof adequate salesvolume.
Further,there shouldbe apotential forgrowthanda reasonable returnoninvestment.Tojudge the adequacy
of the marketthe followingfactors have tobe examined:
- Total presentdomesticmarket
- Competitorsandtheirmarketshares
- Exportmarkets
- Quality- price profileof the productwithrespecttocompetitiveproduct
- Salesanddistributionsystem
- Projectedincrease inconsumption
- Barriersto entryof newunits.
- Patentprotection
- Economic,social anddemographictrendsfavorable toincreasedconsumption.
From the pointof viewof entrepreneurs,the Indianeconomyunlikemostdeveloped,westerneconomies,isnota
“share shift”economywhereinthe growthindemandforaproductis likelytobe atthe demandforothers.
 Reasonablenessofcost: The coststructure of the proposedprojectmustenable ittorealize anacceptable profit
witha price.Followingshouldbe examinedinthisregard:
- Cost of material inputs
- Labor costs
- Factory overheads

- General administrative expenses
- Sellinganddistributioncosts
- Service costs
- Economiesof scale
 Acceptabilityof risk levels:The desirabilityof aprojectiscriticallydependentonthe riskcharacterizingit.To
assessriskfollowingfactorsshouldbe considered:
- Vulnerabilitytobusinesscycles
- Technological changes
- Competitionfromsubstitutes
- Competitionfromimports
- Governmental control overprice anddistribution
Step-7 Project Rating index
 Whena firmevaluatesalarge numberof projectideasregularly,itmaybe helpful tostreamline the processof
preliminaryscreening.Forthispurpose,apreliminaryevaluationmaybe translatedintoaprojectratingindex.
Followingstepsare involvedinprojectratingindex:
- Identifythe factorsrelevantforprojectrating
- Assignweightstothese factors
- Rate the projectproposal onvariousfactors,usinga suitable ratingscale (a5- pointor 7- pointratingscale is
used)
- For eachfactor, multiplythe factorratingwiththe factorweighttoget the factor score
- Addall the factorscores toget the overall projectratingindex
Once a projectratingindex isdetermined,itiscompared withapre-determinedhurdlevalue tojudge whetherthe
projectisworthwhile ornot.
Step-8 Sources of NPV
 Imperfectionsinreal marketsi.e.productandfactormarketsleadto entrybarrierswhichcause positive NPVs.
Hence,an understandingof entrybarriersishelpfulinidentifyingpositive NPVprojects.Thereare 6 mainentry
barriersthat resultinpositive NPVprojects:
1. Economiesof scale:Substantial economiesof scale representslargersize of existingfirms.The more
pronouncedeconomiesof scale the greateristhe costadvantage of the existingfirms.Thiseconomiesof scale
serve asan entrybarriersince the greaterthe capital requirementforthe new entrantthe higheristhe
restrictiontoentry.Thisistrue for:petroleumrefining,mineral extraction,ironandsteel andaluminium.
2. Product differentiation:basisof productdifferentiationcanbe on the basisof:
- Effective advertisingandsuperiormarketing
- Exceptional services
- Innovative productfeatures
- Highqualityanddependability
3. Cost advantage: it mayact as an entrybarrierbecause of followingreason:
- Accumulatedexperience andcomparative edge onthe learningcurve
- Monopolisticaccesstolowcost materials
- A favorable location
- More effectivecostcontrol andcost reduction
4. Marketing Reach: A penetratingmarketingreachisanimportantsource of competitive advantage:
- Avonproductsmarketsitsproductsthrougha worldwidenetworkof 1,300,000 independentsales
representatives.Avon’scompetitorsfinditalmostimpossibleto replicate this.Thankstosucha nonpareil
marketingnetwork,Avonhasbeenable toearnsuperiorreturnsinahighlycompetitiveindustry.

- The breadthand depthof Hindustanlever’sdistributionnetworkismilesaheadof itscompetitors.Sucha
marketingreachhas contributedtothe superiorreturnsearnedbyHindustanlever.
5. Technological Edge:technological superiorityenablesafirmtoenjoyexcellentreturns.Firmslike IBMand
Xerox earnedsuperiorreturnsoverextendedperiodsof time tothe technological edgetheyhadovertheir
rivals.Onthe Indianscene,firmslike Dr.Reddy’sLaboratoryandheroHondahave performedwellbecause of
theirtechnological strength.
6. GovernmentPolicy:A governmentpolicywhichsheltersafirmfromthe onslaught of competitionenablesit
to earnsuperiorreturns.Governmentpoliciesthatcreate entrybarriersinclude the following:
- Restrictive licensing
- Importrestrictions
- Hightariff walls
- Environmental controls
- Special tax reliefs
Step-9 Entrepreneurial Qualities
 Willingnesstomake sacrifices
 Leadership
 Decisiveness
 Confidence inthe project
 Marketingorientation
 Strongego
 Openmindedness
Project Formulation
 Projectformulationisaninvestigatingprocesswhichprecedesinvestmentdecision.The purpose isto present
relevantfactsbefore the decision-makerstoenable themtodecide astowhethertogoahead signal shouldbe
givenforthe projector not.
 It explainsthe objectives,goalsandjustificationforthe acceptance of the project.
 It involvesthe identificationof investmentoptionsbythe enterprise.
 It isa processinvolvingthe jointeffortof ateam of expertsincludingthe economists,the financialanalysisand
specialistsinvariousfields.
 A well formulatedprojectprovidesamediumwhichoutacrossscientific,social andpositional prejudicesand
providesacommonmeetinggroundforall those whohave a contributiontomake successful implementationof
a project.
Stages in Project formulation:
 Feasibilityanalysis
 Techno-economicanalysis
 Projectdesignandnetworkanalysis
 Inputanalysis
 Financial analysis
 Socio-costbenefitanalysis
 Projectappraisal
 Stage-1 Feasibility Analysis
 Feasibilityanalysisisthe firststagesinthe processof projectdevelopment.
 Purpose:Toexamine the desirabilityof investinginpre-investmentstudies.Forthispurpose itisessentialto
examine projectideainthe lightof the available internal (inputs,resources&outputs) andexternal constraints
(environment).

 Whena projectideaistakenup for developmental three situationscanarise:
a. The projectmay appearto be feasible,projectmayturnout to be not feasibleorthe available datamaynotbe
adequate forarrivingatreasonable decisionregardingfurtherinvestment.Inthe lastmentionedcase,
investmentin pre-investmentstudieswill obviouslyhave tobe adequate forarrivingatreasonable decision
regardingfurtherinvestment.Inthe lastmentionedcase,investmentinpre-investmentstudieswill obviously
have to e deferredtillsuchtime isadequate date regardingthe projectfeasibilityisavailable.The project
sponsoringbodywill therefore have toinvestincollectionadditional dataandreferthe investmentdecisionfor
the time being.
b. In the secondsituationwhenthe projectisfoundtoe notfeasible,furtherinvestmentinthe projectideais
completelyruledout.
c. In the thirdsituation,whenthe projectideaisfoundtobe feasible,the decision-makerscanproceedtoinvest
furtherresourcesinpre-investmentstudiesanddesigndevelopment.
Stage-2 Techno-Economic Analysis
 Techno-economicanalysisisprimarilyconcernedwith the identificationof projectdemandpotential andthe
selectionof the optimal technologywhichcanbe usedto achieve the projectobjectives.
 The analysisprovidesnecessarymaterialonwhichthe projectdesigncanbe based.
 It alsoindicateswhetherthe economyisinpositiontoabsorbthe outputof the projector not.
Stage-3 Project Design and Network Analysis
 Projectdesignisthe heartof the projectentity.
 It definesthe individualactivitieswhichgointothe corpusof the projectandtheirinter-relationshipwitheach
other.
 It identifiesthe flowof events, whichmusttake place before aprojectcanstart yieldingthe resultsforwhichit
has beensetup.
 The inter-relationshipbetweenvariousconstituentactivitiesof aprojectinmost convenientlyexpressedinthe
formof a networkdiagram.
 Projectdesignandnetworkanalysisare concernedprimarilywiththe developmentof the detailedworkplansof
the projectand its time profile, andthe presentationof thisplanisformof a detaileddrawingnetwork.
 Projectdesignandnetworkanalysis make available tothe projectformulationteam aclearpicture of the work
elementsof the projectand alsotheirsequentialrelationship.
 It presentsthe wayfordetailedidentificationandquantificationof the projectinputs,anessential stepinthe
developmentof the financial andcost-benefitprofileof the project.
Stage-4 Input analysis
 The objective isto identifyandquantify the projectinputs andtoassessthe feasibilityof asustainedsupplyof
these inputsall throughthe effectivelifespanof the project.
 Resourcesare consumedinprojectconstituentactivities.
 The bestmethodof identifyingthe projectinputsistoidentifytheseactivitiesdeterminethe resourceswhich
each activitywill consumeindividual requirements.
 Inputanalysis usesthe networkplansfordevelopingthe inputcharacteristicsof the project. If thereafter
proceedsto evaluate the availabilityof the inputsbothinquantitative aswell asqualitative terms.
 Resourcesrequire forasuccessful implementationof aproject include notonlythe material inputsbutalso
humanresources whichare necessarybothforthe settingupof the projectas alsoits successful normalization
run.
 Resourcesrequirementsestimatesformthe basisof costsestimatesof the projectandare,therefore,essential
for developingthe financial profile andcost-benefitprofileof the project.
Stage-5 Financial Analysis

 Objective of financial analysisistodevelopthe projectfromthe financial angleandtoidentifythese
characteristics.
 Financial analysisconcernsitselfwiththe estimationof the projectcosts,estimationof projectfunds
requirements
 Involvesappraisal of the financial characteristicsof the projecttoestablishthe relative meritsanddemeritsof
the projectas comparedto otherinvestmentopportunities.
 Reducesinvestmentpropositionindiverse fieldsof humanactivitytoone commonscale,therebysimplifyingthe
projectisdevelopingprojectfinancial forecasts.
Stage-6 Social cost benefit Analysis
 In judgingthe overall worthinessof the project,the effectof the projectonsocietyasa whole isveryessential.
 While financial analysisevaluatesa projectfromthe profitabilitypointof view,social costbenefitanalysisviews
it fromthe pointof viewof national viability.
 The cost-benefitanalysistakesintoaccountnotonlythe directcostsand benefitswhichwill accrue tothe
projectimplementingbodybutalsototal costswhichall entitiesconnectedwiththe projectwill have tobear
and the benefitswhichwellbe enjoyedbyall suchentities.
 The ideahere isto evaluate the projectintermsof absolute costsandbenefitsratherthanintermsapparent
costs andbenefits.
Stage-7 Pre-Investment Appraisal
 Pre investmentappraisalisthe processof consolidatingthe resultsof feasibilityanalysis,the techno-economic
analysis,the designandnetworkanalysis,the inputanalysis,the financial analysisandthe costbenefitanalysis,
so as to give the investmentpropositionafinal andformal shape.
 It naturallyinvolvesselectionof appraisal format,the materialwhichshouldgointopre-investmentreportand
the form of presentationof various conclusions.
 The sum total of the pre-investmentappraisal istopresentthe projectideainaforminwhichthe project
sponsoringbody,the projectimplementingbodyandthe outside agenciescantake investmentdecision
regardingthe proposals.
Social-Cost Benefit Analysis
 It isa methodologyforevaluatinginvestmentprojectsfromsocial pointof view.
 SCBA seekstoassessthe utilityof a projectto societyasa whole.Itattemptstoseparate all the expected
changesviz.economic,social andenvironmental likelytoarise asa resultof implementingthe project.
 These can be representedasinputsandoutputsof a projectanda price can be put to eachof these inputan
output.
 Since bothinputsandoutputsare spreadovera numberof years,it isnecessarytocombine the costsand
benefitsstreamthatarise overthe economiclifeof the project.
 The National RehabilitationandResettlementPolicyof 2007 hasintroducedthe conceptof Social Impact
Assessment(SIA) of Projects.
 While undertakingasocial impactassessment,the appropriateGovernmentshall,interalia,take into
considerationthe impactthatthe projectwill have onpublicandcommunityproperties,assetsand
infrastructure;particularly,roads,publictransport,drainage,sanitation,sourcesof safe drinkingwater,sources
of drinkingwaterforcattle,communityponds,grazingland,plantations;publicutilities,suchaspost offices,fair
price shops,etc.;foodstorage,godowns,electricitysupply,healthcare facilities,schoolsand
educational/trainingfacilities,placesof worship,landfortraditional tribal institutions,burialandcremation
grounds,etc.
Rationale for SCBA

1. Market imperfections: Market prices,whichformthe basisforcomputingthe monetarycostsand benefits
fromthe pointof viewof projectsponsor,reflectsocial valuesonlyunderconditionsof perfectcompetition,
whichare rarely,if ever,realizedbydevelopingcountries.Whenimperfectionsobtain,marketpricesdonot
reflectsocial values.
The common marketimperfectionsfoundindevelopingcountriesare:
i. Rationing: of a commoditymeanscontrol overitsprice anddistribution.The price paidbya consumerunder
rationingisoftensignificantlylessthanthe price thatwouldprevail inacompetitive market.
ii. Prescriptionof minimumwage rates: Whenminimumwage ratesare prescribed,the wagespaidtolaborare
usuallymore thanwhatthe wageswouldbe ina competitivelabormarketfree fromsuchwage legislations.
iii. ForeignExchange Regulation:The official rate of foreignexchange inmostof the developingcountries,which
exercise close regulationoverforeignexchange,islessthanthe rate thatwouldprevail inthe absence of foreign
exchange regulation.Thisiswhyforeignexchange usually commandspremiuminunofficial transactions.
2. Externalities:A projectmay have beneficial external effects.
For example,itmaycreate certaininfrastructural facilitieslikeroadswhichbenefitthe neighbouringareas.Suchbenefits
are consideredinSCBA,thoughtheyare ignoredinassessingthe monetarybenefitstothe projectsponsorsbecause
theydo notreceive anymonetarycompensationfromthose whoenjoythisexternalbenefitcreatedbythe project.
A projectmayhave a harmful external effectlike environmentalpollution.
In SCBA,the cost of such environmental pollutionisrelevant,thoughthe projectsponsorsdonotincurany monetary
costs.It may be emphasizedthatexternalitiesare relevantinSCBA because insuchanalysisall costsandbenefits,
irrespectivetowhomtheyaccrue and whethertheyare paidforor not, are relevant.
3. Taxes and subsidies: From the private pointof view,taxesare definitemonetarycostsandsubsidiesare definite
monetarygains. From the social pointof view, however,taxesandsubsidiesare regardedastransferpaymentsand
hence consideredirrelevant.
4. Concern for redistribution: A private firmdoesnotbotherhow itsbenefitsare distributedacrossvariousgroupsin
the society.The societyisconcernedaboutthe distributionof benefitsacrossdifferentgroups.A rupee of benefitgoing
to a poor sectionisconsideredmore valuable thanarupee of benefitgoingtoan affluentsection.
5. Merit wants: Goalsand preferencesnotexpressedinthe marketplace, butbelievedbypolicymakerstobe inthe
largersocial interest,maybe referredtoasmeritwants.
For example,the governmentmayprefertopromote adulteducationorabalancednutritionprogramforschool -going
childreneventhoughtheseare notsoughtbyconsumersinthe market place.
While meritwants are not relevantfrom the private pointof view,they are important from the social point of view.
6. Concern for savings: Unconcernedabouthow itsbenefitsare dividedbetweenconsumptionandsavings,aprivate
firmdoesnotput differential valuationonsavingsandconsumption.Fromasocial pointof view,however,the division
of benefitsbetweenconsumptionand savings(whichleadsto investment) isrelevantparticularly in capital-scarce
developingcountries.
A rupee of benefitssavedisdeemedmore valuable thanarupee of benefitsconsumed. The concernof societyfor
savingsandinvestmentisdulyreflectedinSCBA whereinahighervaluationisplacedonsavingsandlowervaluationis
put onconsumption.
Social-Cost Benefit Analysis
It coversfive distinctissues:
1. Assessingthe desirabilityof projectsinthe public,asopposedtothe private sector.
2. Identificationof costsandbenefits.
3. Measurementof costsand benefits.
4. The effectof (riskanduncertainty) time ininvestmentappraisal.
5. Presentationof results–the investmentcriterion.

Two Principal Approaches for SCBA
 The UNIDOapproach
 The Little-Mirrleesapproach
These approachesare discussedindetail inupcomingsections.
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANISATION APPROACH
(UNIDO)
The UNIDO methodof projectappraisal involvesfivestages:
1. Calculationof financial profitabilityof the projectmeasuredatmarketprices
2. Obtainingthe netbenefitof projectmeasuredintermsof economic(efficiency) prices.
3. Adjustmentforthe impactof the projecton savingsandinvestment.
4. Adjustmentforthe impactof the projecton income distribution.
5. Adjustmentforthe impactof projectonmeritgoodsand demeritgoodswhose social valuesdifferfromtheir
economicvalues.
UNIDO Approach- 1
1. Calculationof financial profitabilityof the project measuredat market prices:
 A projectfinancial evaluationtellsyouwhethera projectwill contribute toyourcompany'soverall goalsorbe a
drainon your resources.
 For a financial evaluationtohelpyoudecide whethertoproceedwithaproject,youhave to first establishyour
overall goals.
 Decide whetherthe projecthas to immediatelymake a contribution to the bottom line or whetheryou are
taking a longer-termview.
 Decide howprofitable ithastobe comparedwithotherattractive projectsyoucouldundertake orwhethera
marginallyprofitable projectmakessensebecause itachievesotherpositive goals.
 The financial evaluationgivesyouafinancial result,butyouhave todecide whetherthatresultisattractive
enoughtoproceedwiththe project.
 To get the total financingcosts,youhave to take the projectedcostsof the projectas you wouldincurthemand
add themto a theoretical loanatthe currentinterestrate forsuch financing.
UNIDO Approach: Step-2
2. Obtaining the net benefit of project measured in terms of economic(efficiency)/Shadow prices:
The UNIDO approach suggeststhree sourcesof shadow pricing,dependingonthe impactof the projecton
national economy.A projectasit usesandproducesresourcesmayforany giveninputoroutput:
 Increase or decrease the total consumptioninthe economy: The basisof shadow pricinghere is
consumerwillingnesstopay.
 Decrease or increase productioninthe economy: The basisof shadow pricinghere isthe costof production.
 Decrease importsorincrease importsorIncrease exportsordecrease exports: Here, the basisof shadowpricing
isthe foreignexchangevalue.
 Shadowpricingof tradable inputsandoutputs: Forfullytradedgoods,the shadow price isthe borderprice,
translatedindomesticcurrencyatmarketexchange rate.The above definitionof afullytradedgoodimplies
that domesticchangesindemandorsupplyaffectjustthe level of importsorexports.
 Non-tradable inputsandoutputs: A goodisnon-tradable whenthe followingconditionsare satisfied:I) its
importprice isgreaterthan itsdomesticcostof productionand(ii) itsexportprice islessthanitsdomesticcost
of production.
 On the outputside,if the impactof the projectisto increase the consumptionof the productinthe economy,
the measure of value isthe marginal consumers’willingnesstopay;if the impactof the projectisto substitute

otherproductionof the same non-tradable inthe economy,the measure of valueisthe savingincostof
production.
 On the inputside,if the impactof the projectisto reduce the availabilityof the inputtootherusers,their
willingnesstopayfor the inputrepresentssocial value;if the project’sinputrequirementismetbyadditional
productionof it,the productioncostof it isthe measure of social value.
Externalities(external effect): Anexternalityisaspecial classof goodwhichhas the followingcharacteristics:
 It isnot deliberatelycreatedbythe projectsponsorbutisan incidental outcome of legitimate economicactivity,
 It isbeyondthe control of the personswhoare affected byit,forbetteror for worse.
 It isnot tradedin the marketplace.
 Beneficialexternal effectsare:
(i) Anoil companydrillinginitsownfieldsmaygenerate useful informationaboutoil potentialinthe neighboringfields.
(ii) The approachroads builtbya companymay improve the transportsysteminthatarea.
 Harmful external effectsare:
1. A factorymay cause environmental pollutionbyemittinglarge volumeof smoke anddirt.Peoplelivinginthe
neighborhoodmaybe exposedtohealthhazardsandputto inconvenience.
2. The locationof an airport ina certainareamay raise noise levelsconsiderablyinthe neighborhood.
 UNIDO Approach: Step-3 &4
3. Measuring the value ofa project in termsof its contributionto savingsand income redistribution:
We firstMeasure the income gainedorlostby individual groupswithinthe society.
The UNIDO approach seekstoidentifyincome gainsandlossesbythe following:(i) Project,(ii) Otherprivatebusiness,
(iii) Government,(iv) Workers,(v)Consumers,(vi) External sector.
The gain or lossto an individual groupwithinthe societydue tothe projectisequal tothe differencebetweenshadow
price and marketprice of each inputor outputinthe case of physical resourcesorthendifferencebetweenprice paid
and value receivedinthe case of financial transaction.
Value of savingsof a rupee isthe presentvalue of additionalconsumptionstream
Valueof savings of a rupee isthe presentvalue of the additional consumptionstreamproducedwhenthatrupee of
savingsisinvestedatthe margin.

The additional streamof consumptiongeneratedbyarupee of investmentdependsonthe marginal productivityof
capital and the rate of reinvestmentfromadditional income.
If the marginal productivityof capital isrand the rate of reinvestmentfromadditional incomea,the additional stream
of consumptiongeneratedbyarupee of investmentcanbe workedout.
The consumptionstreamstartswithr (1 – a) and grows annuallyatthe rate of ar forever.Itspresentvalue when
discountedatthe social discountrate k is:-
 Income distributionimpact
 Governmentsregardredistributionof income infavorof economicallyweakersectionsoreconomically
backwardregionsas a sociallydesirable objective.
 Due to practical difficultiesin pursuingthe objective of redistributionentirelythroughthe tax,subsidy,and
transfermeasuresof the government,
 Investmentprojectsare alsoconsideredasinstrumentsforincome redistributionandtheircontributiontoward
thisgoal is consideredintheirevaluation.
 Thiscallsfor suitablyweighingthe netgainorlossbyeach groups,measuredearlier,toreflectthe relative value
of income fordifferentgroupsandsummingthem.
UNIDO Approach: Step-5
Adjustmentfor meritand demeritgoods
 Thisis done toreflectthe difference betweenthe economicvalue andsocial value of resources.
 Thisdifference existsinthe case of meritgoodsand demeritgoods.
 A meritgoodisone for whichthe social value exceedsthe economicvalue.
 For example, acountryplacinghighersocial value thaneconomicvalue onproductionof oil since itreduces
dependence onforeignsupplies.
 A demeritgood,the social value of the goodislessthanitseconomicvalue.
 For example, acountrymayregard alcoholicproductshavingsocial value lessthaneconomicvalue.
The procedure foradjustingforthe differencebetweensocial value andeconomicvalue isasfollows:
(i) Estimate the economicvalue.
(ii) Calculate the adjustmentfactorasdifference between the ratioof social value toeconomicvalue andunity.
(iii) Multiplythe economicvalue bythe adjustmentfactortoobtainthe adjustment.
(iv) Addthe adjustmenttothe netpresentvalue of the project.
Little-Mirrlees Approach
 AlsoknownasL-M approach.
 It assumesthata country can buyand sell anyquantityof a particulargoodat a givenworldprice.
 Hence,all tradedinputsandoutputsare valuedattheirinternational prices(CIFforimportsandFOBfor
exports) whichisthe opportunitycost/valueof the particulargoodtothe country.
 Everyinputistreatedas a forex outgoand everyoutputistreatedasa forex inflow.
 All non-tradable inputsare valuedataccountingprices.
 These costsare brokenupintotradable goodsand othernon-tradedgoods.Followingthischainof production,
commoditiesthatare eitherexportedorimportedare determinedforapplicationof accountingprices.
 The theoryassumesthatnon-tradeablesformaninsignificantpartof operatingcosts
Difference betweenLM approachand UNIDO approach
UNIDO Approach LM approach

Opportunity Cost: Relevant cost in SCBA
 The opportunitycostisthe cost of alternative foregone due toaparticularcourse of action.
 Example:The opportunitycostof self-employmentisthe salaryforthe bestjobhe couldhave obtained.Butif he
doesnothave any jobopportunityotherthanthe self-employment,there isnoopportunitycostforthe self-
employment.
 In the opportunitycostanalysispertainingtothe national profitabilityanalysisitisnotthe commercial
profitabilitybutthe netcontributiontothe national objective thatisconsidered.
 Example,the situationof acommercial bankhaving toconsiderapplicationsforloanbytwoprojects – a textile
retail shopinan existingcommercial areasinacity and an agricultural developmentscheme –andthat the
loanable fundswiththe bankissufficientonlyfinance anyone of these twocompeting projects.Assume,
further,thatthe commercial profitabilityof the textileshopisrelativelyhighandthatof the agricultural project
islowbut it will increase the outputof some importantagriculture commodity.Inthissituationthe lending
institutionshouldpreferthe agricultural projectbecause thoughitiscommerciallylessviablethanthe textile
shop,itwill make a highercontributiontothe national output.Evenif the proposedtextileshopisnotopened,
the total textileoutputorsale will notbe affectedbutif the agricultural projectisnotassisted,itwill adversely
affectthe total output.It clearlyshowsthatinthe national profitabilityanalysis,applicationof the opportunity
cost principle isveryessential.
Social-Economic viability of a project can be judged on the basis of its
net contribution to:
 Aggregate consumptionandeconomicgrowth
 Generationof employment
 Income distribution
 Foreignexchange earnings/savings
 Self-reliance
 Developmentof backwardregions
 Developmentof small-scaleandancillaryindustries
 Backward andforwardlinkagesanddevelopmentof otherindustries/sectors
 Developmentsof infrastructure
 Development/Improvementandtransfertotechnology
 Improvementof qualityandproductivity
 Improvementinthe qualityof life andnational well-being.
Social infrastructure Projects for Sustainable Development
1. It measures costs andbenefits interms of
domestic rupees.
1. It measures costs andbenefits interms of interna
prices.
2. The UNIDO approach measures costs and
benefits interms of consumption.
2. The Little-Mirrlees approach measures costs
and benefits interms of uncommittedsocial income
3. The stage-by-stage analysisby the UNIDO
approach focuses on efficiency, savings and
redistributionconsiderations indifferent stages.
3. The Little-Mirleesapproach, tends to viewthese c

 In case of publicprojectslike irrigationprojects,powerprojects,transportprojectsorotherinfrastructural
projectsor social overheadprojects, Nationalprofitability(i.e.the netsocioeconomicbenefits) considerations
are more importantthancommercial profitabilityconsideration.
 Evenin respectof projectssponsoredbyprivate entrepreneurs,nationalprofitabilityanalysisisimportant,
particularly indevelopingcountries,becauseof the needtooptimize the utilizationof scarce resource fromthe
societal pointof view.
 Large infrastructure projectscanleadtoeconomicandsocial benefitstomassesif theyare plannedand
executedinaninclusive, sociallyresponsible andenvironmentallysoundmanner.
 The core ideaof sustainable developmentisdevelopmentthatmeetsthe needof the presentwithout
compromisingthe abilityof future generationtomeettheirownneeds.The WorldCommissiononEnvironment
and Developmentaddedthat“Sustainable Developmentisaprocessof change inwhichthe exploitationof the
resources,the directionof investments,the orientationof technologyandinstitutional change are all in
harmony…”

 Investment Opportunities
 Indiaisone of the fastestgrowingeconomiesinthe worldandhasemergedasa keydestinationforforeign
investorsinrecentyears.
 Economicreformsinitiatedin1991 have grownin scope and scale andyieldedincreasinglysalutarydividends.
 Firstis the steadyimprovementinIndia’srelative positioninthe global economy,reflectedinNew Delhi’s
growinginfluence ininternational institutionsandnegotiatingfree trade areas(withASEAN(associationof
south-eastAsiannations),EU).
 Secondisthe improvedefficiencyinthe economyandadoptionof international “bestpractices”inthe
productionof a range of goodsand services.
 A thirdoutcome isIndiarankingamongstthe top 10 investmentdestinationssince 2007-08, attractingUS$ 195
billioninFDIandUS$ 97 billioninFIIoverthe past5 years.
 India’sGDPhas alsogrown at around7.9 per centbetween2003 and 2012. Thistrend,accordingto the
International MonetaryFund(IMF)1,islikelytocontinue forthe nextfive yearswithanaverage GDP growth
rate of 7.7 per centperannum till 2017.
 India’sGDPfor 2013, valuedatUS$ 1.9 trillionatcurrentpricesisthe 10th largestinthe world.
 The governmenthasseta target of 8 percent duringthe currentFive Year Plan(2012-2017), basedonthe
demonstratedabilitytosustainnational economicgrowthdespitethe global financial crisis,Eurozone woesand
the resultantslackexternal demandinrecentyears.
 Indiaisa favorable demographyforhighergrowth: Indiasupportsone of the largestpopulationsinthe world,
and one of the youngest.50%of itspopulationisbelow the age of 25 and 2/3rd
below the age of 35. About65
percent of Indiansare in the workingage groupof 15 to 64 years,givingthe countrya significantedge interms
of costcompetitivenessandlowlaborcosts.Moreover,India’slaborforce hasa strongknowledge base witha
significantEnglish-speakingpopulation,makingitatop destinationformultinationalcorporationsthatare
lookingtoexpandtheiroverseasoperationsfor marketandtalent.
 The Indianconsumermarketwill grow2.5 timesby2025: ConsumerspendinginIndiagrew fromUS$ 549 billion
to US$ 1.06 trillion between2006 and2011, puttingIndiaonthe path to becomingone of the world’slargest
consumermarkets by2025. India’sconsumptionisexpectedtorise 7.3 percent annuallyoverthe next20 years.
By 2040, nine outof everytenIndianswill belongto‘the global middle classgroup’ withdailyexpenditures
rangingbetweenUS$10 and US$ 100 perpersonintoday’spurchasingpowerparityterms.

 ForeignDirectInvestmentinIndia: TrendsinIndia’sFDIare an endorsementof itsstatusas a preferred
investmentdestinationamongstglobal investors.India'sstrengthsspantelecommunications,information
technology,autocomponents,chemicals,apparels,pharmaceuticals,andjewelry.India’ssteadyeconomic
liberalizationanditsembrace of the global economyhave beenkeyfactorsinattractingFDI.The government
recentlyopenedupmulti-brandretail andcivil aviationmarketsto51 and 49 percent FDI respectivelyandwith
more reformsexpectedininsuranceandpensionsectors,amongothers,Indiawill continuetooffercompelling
opportunitiestothe global investmentcommunity.
Unit-2
Market and Technical Analysis
Topics to be covered:
 Market and Demand Analysis: Marketsurvey,DemandForecasting,UncertaintiesinDemandForecasting;
Technical analysis:Productmix,Plantcapacity,Materialsandinputs,MachineryandEquipment.
 Project Costingand Finance:Cost of project,Costof Production,break-evenanalysis,meansof Financing
Project,Tax aspectsin ProjectFinance,role of FinancialinstitutioninProjectFinance.
Forecasting
 Predictingthe future
 Qualitative forecastmethods:-
 Subjective
 Quantitative forecastmethods:-
 Basedon Mathematical Formulas
 Dependon:-
 Time Frame
 Demandbehavior
 Causesof behavior
How is Forecasting different from prediction?
 Forecastis an estimate of future eventsandtrends andisarrivedat bysystematicallycombiningpastdata and
projectingitforwardina predeterminedmanner.
 Prediction isanestimate of future eventsandtrendsina subjectivemannerwithouttakingintoaccountthe past
data. The subjective considerationsmaynotemerge fromanypredeterminedanalysisorapproach.
Why marketand demandanalysisisimportantinprojectanalysis?
 As an essentialpartof projectformulationandappraisal,MarketandDemandanalysisisvital sothatcapacity
and facilitylocationcanbe plannedandimplementedinline withthe marketrequirements.
 Market and DemandAnalysisisconcernedwithtwobroadissues:
1. What isthe likelyaggregatedemandforthe product/service?
2. What share of the marketwill the proposedprojectenjoy?
 Longer-termforecastingisalsoundertakentodeterminetrendsintechnologydevelopmentsoasto choose the
technologyforbackingupand fundingitsresearchanddevelopment.
Market and Demand Analysis
 Market and demandanalysisof varioustypesare undertakentomeetspecificrequirementsof planningand
decisionmaking.
 For example,short-termdecisionsinproductionplanning,distributionetc.andsellingindividualproductswould
require short-termforecast,uptoone yeartime horizon,whichmusthe fairlyaccurate forspecificproduct
items.Forlong-termplanning,time horizonbeingfourtofive years,informationrequiredfromdemandanalysis

wouldbe forbroad productgroups forfacilitatingchoice of technology,machinetoolsandotherhardware and
theirlocation.
 Market and demandanalysisare carriedoutbythe projectmanagerinthe processof evaluatingaprojectidea.
 There are six steps in the market and demand analysis:
1. Situational analysisandobjectivesspecification
2. Collectionof data
3. Market Survey
4. Market Description
5. DemandForecasting
6. Market Planning.
The market anddemandanalysishelpsthe projectmanagertounderstandhow the firm’sabilitiescanbe synchronized
withmarketrequirements.
Market analysisstudiesmarketneedsandconsumerpreferencesforagivenprojectideaanddemand analysisaimsat
calculatingthe aggregateddemandforaparticularproduct or service.
1. Situational Analysis andSpecificationof objectives
 To get a “feel”forthe relationshipbetweenthe productandit’smarket,the projectanalystmayinformally talk
to customers,competitors,middlemenandotherinthe industry.
 Look at the experience of the companytolearnaboutthe purchasingpowerof customer,action& strategiesof
competitors.
 The objectivesof market& Demand analysis,to answerthefollowing question : (how to marketthe newair
cooler overconventionalaircoolers…)
 Who are the buyersof air cooler?
 What isthe total currentdemandfor aircoolers?
 What price will the customerbe willingtopay for the improvedaircooler?
 What price & warranty will ensure itsacceptance?
 What are the prospectsof immediate sales?
 How can potential customersbe convincedaboutthe superiorityof the new cooler?

2. Collectionof Secondary information
 SecondaryInformationisinformationthathasbeengathered insome othercontextandisalreadyavailable.
 Thisinformationhelpsinansweringquestionsthatwere askedinpreviouspoint.
 Secondaryinformationprovidesthe base andstartingpointforthe Market & DemandAnalysis.
 General Sourcesof Secondary Information:Censusof India(lastcensusdone in2011),National Sample Survey
Report,PlanReports,EconomicSurveyetc.
 IndustrySpecificSourcesof SecondaryInformation
 Evaluationof SecondaryInformation: The reliability,accuracy,andrelevance for the purpose mustbe carefully
examinedproperly.Questionslike the followingare askedtojudge the reliabilityof the information
- Who gatheredthe information?
- What was the objective?
- Whenwas the informationgathered?
- Whenwas itpublished?
- How wasthe sample chosen?Etc.
3. Conduct of Market Survey
 Secondaryinformationaloneisnotveryuseful,ithastobe supplementedwithprimaryinformationgathered
througha market survey,thatmaybe a censussurveyora sample survey.
 Censussurveyare employed principallyforintermediate goods&investmentgoodswhensuchgoodsare used
by a small numberof firms.
 In a censussurvey,the entire populationiscovered(where populationreferstothe totalityof all unitsunder
considerationinaspecificstudy).
 Some Problemsthata marketresearcherhasto come across inIndia:
- Heterogeneityof the Country
- Multiplicityof the Languages
- Designof Questionnaire
Stepsina Sample Survey:
 Define the TargetPopulation
 Selectthe SamplingScheme andSample Size
 Develop the Questionnaire
 Recruitand Trainthe FieldInvestigators
 ObtainInformationasPerthe Questionnaire fromthe Sample of Respondents
 Scrutinizesthe InformationGathered
 Analyze andinterpretthe Information
4. Characterizationof the Market
Basedon the informationgatheredfromsecondarysourcesandthroughthe marketsurvey,the marketforthe product
may be describedintermsof:
 Effective Demandinthe PastandPresentisdefinedas:Production+Imports – Exports– Change instock level
 Breakdownof Demand:The aggregate marketdemandmybe brokendownintodemandfordifferentsegments
of the market:
 Nature of Product
 ConsumerGroups:can be classifiedasindustrialconsumersanddomesticconsumers,income wise
classificationcanalsobe done.
 Geographical Division
 Price:manufacturer’sprice quotedasFOBprice,landedprice forimportedgoods,average wholesale price,
average retail price.

 Methodsof DistributionandSalesPromotion
 Consumers
 SupplyandCompetition
 GovernmentPolicy
5. Demand Forecasting
Aftergatheringinformationaboutvariousaspectsof the marketanddemandfromprimaryandsecondarysources,an
attemptmay be made to estimate future demand.
Methodsusedare:
1. Qualitative methods:These methodsrelyessentiallyonthe judgmentof expertstotranslate qualitative
informationintoquantitativeestimates.
- Usedto generate forecastsif historical dataare notavailable (e.g.,introductionof new product).
- Qualitative methodsare:
 Jury of Executive Method
 Delphi Method
2. Time SeriesProjectionMethods:these methodsgenerate forecastsonthe basisof ananalysisof the historical time
series.Importantmethodsare:
 Trend Projection method
 Exponentialsmootheningmethod
 Moving averagemethod
3. Casual methods:More analytical thanthe precedingmethods,casual methodsseektodevelopforecastsonthe basis
of cause-effectrelationshipsspecifiedinanexplicit,quantitative manner.Importantcasual methodsare:
 Chainratiomethod
 Consumptionlevelmethod
 End use method
 Leadingindicatormethod
 Econometricmethod
Jury of Executive OpinionMethod
 Rationale
 Upper-level managementhasbestinformationonlatestproductdevelopmentsandfuture product
launches
 Approach
 Small groupof upper-level managerscollectivelydevelopforecasts –Opinionof Group
 Main advantages
 Combine knowledgeandexpertisefromvariousfunctional areas
 People whohave bestinformationonfuture developmentsgeneratethe forecasts
Main drawbacks
 Expensive,Subjective innature.
 No individual responsibilityforforecastquality.
 Riskthat fewpeople dominate the group.
 Reliabilityisquestionable.
 Typical applications
 Short-termandmedium-termdemandforecasting
Delphi Method

 Rationale:
1. Elicitingthe opinionsof agroupof experts with the helpof mail survey.
2. Anonymouswrittenresponsesencourage honestyandavoidthata groupof expertsare dominatedbyonlyafew
members
 Main advantages
 Generate consensus
 Can forecastlong-termtrendwithoutavailabilityof historical data
 Main drawbacks
 Slowprocess
 Expertsare not accountable fortheirresponses
 Little evidence thatreliable long-termforecastscanbe generatedwithDelphi orothermethods
 Typical application
- Long-termforecasting
- Technologyforecasting
Time Series Projection Methods
 These methodsgenerate forecastsonthe basisof an analysisof the historical time series.
 Assume thatwhathas occurred inthe past will continue tooccurinthe future
 Relate the forecasttoonlyone factor - time
The importanttime series projectionmethodsare:
 TrendProjectionMethod.
 Exponential SmoothingMethod.
 MovingAverage Method.
Trend Projection Method

Exponential smoothing
 Thisis a widelyusedforecastingtechnique inretailing,eventhoughithasnotproventobe especiallyaccurate.
 Exponential smoothing isatechnique thatcan be appliedto time series data,eithertoproduce smootheddata
for presentation,ortomake forecasts.The time seriesdatathemselvesare asequence of observations.The
observedphenomenonmaybe anessentially randomprocess,oritmaybe an orderly,but noisy,process.
Whereasinthe simple movingaverage the pastobservationsare weightedequally,exponentialsmoothing
assignsexponentiallydecreasingweightsovertime.
 Exponential smoothing, forecastsare modifiedinthe lightof observederrors.
 If the forecastvalue foryeart,
 Ft is lessthanthe actual value foryeart,
 St the forecastfor the year t+1, Ft + 1
Ft + 1 = Ft + α et
Where,

Ft + 1 = forecastfor year
α = smoothingparameter,liesbetween0and1
et = errorin the forecastforyear t = St - Ft
 The range of possible valuesiszeroandone.
 If you selectavalue of  close to1, that meansyouare attachinga large weighttothe most recentobservation.
Thisis notindicatedif yourseriesisveryerratic(swingswidelyfromperiodtoperiod).
 Exponential smoothingisatechnique formanipulatingdatafroma seriesof chronological observationsto
downplaythe effectsof randomvariation.
 Mathematical modeling,the creationof anumerical simulationforadata set,oftentreatsobserveddataasthe
sumof twoor more components,one of whichisrandomerror,the differencesbetweenthe observedvalue
and the underlyingtrue value.
 Whenproperlyapplied,smoothingtechniquesminimize the effectof the randomvariation,makingiteasierto
see the underlyingphenomenon — abenefitbothinpresentingthe dataandin makingforecastsof future
values.
 Theyare referredtoas "smoothing"techniquesbecause theyremove jaggedupsanddownsassociatedwith
randomvariationandleave behindasmootherline orcurve whenthe dataisgraphed.
 The disadvantage of smoothingtechniquesisthatwhenimproperlyusedtheycanalsosmoothawayimportant
trendsor cyclical changeswithinthe dataas well asthe randomvariation,andtherebydistortanypredictions
theyoffer.

Moving average method
Causal Methods
 Causal methodsseek todevelopforecastsonthe basisof cause-effectsrelationships specifiedinanexplicit,
quantitative manner.
 ChainRatioMethod
 ConsumptionLevelMethod
 End Use Method
 LeadingIndicatorMethod
 EconometricMethod
 Consumption Level Method
Useful fora product whichisdirectlyconsumed,thismethodestimatesconsumptionlevelonthe basisof elasticity
coefficients,the importantonesbeingthe income elasticityof demandandthe price elasticityof demand.
Incomeelasticity of demand— The income elasticityof demandreflectsthe responsivenessof demandtovariationsin
income.Itismeasuredasfollows:
Price Elasticity:itreferstothe responsivenessof demandtovariationinprices. The price elasticityof demandisauseful
tool indemandanalysis.The future volumeof demandmaybe estimatedonthe basisof the price elasticitycoefficient
and expectedprice change.The price elasticitycoefficientmayalsobe usedtostudythe impactof variable price that

may obtaininfuture onthe economicviabilityof the project.Inusingthe price elasticitymeasure,however,the
followingconsiderationsshouldbe borne inmind:
1. The price elasticitycoefficientisapplicable toonlysmall variations.
2. The price elasticitymeasure isbasedonthe assumption thatthe structure andbehaviorremainconstant.
End Use Method
 Suitable forestimatingdemandforintermediate products
 Alsocalledasconsumptioncoefficientmethod
Steps
1. Identifythe possibleusesof the products
2. Define the consumptioncoefficientof the productfor varioususes
3. Projectthe outputlevelsforthe consumingindustries
4. Derive the demandforthe project
The keyinputsrequiredforthe applicationof the end-use methodare:
1. Projectedoutputlevelsof consumingindustries(units)
2. Consumption coefficients.
 It may be difficulttoestimatethe projectedoutputlevelsof consumingindustries(units).
 More important,the consumptioncoefficientsmayvaryfromone periodtoanotherin the wake of
technological changesandimprovementsinthe methodsof manufacturing.
 Hence,the end-use methodshouldbe usedjudiciously.
Leading Indicator Method
 Leadingindicatorsare variableswhichchange aheadof othervariables, the laggingvariables. Hence,observed
changesinleadingindicatorsmaybe usedtopredictthe changesinlaggingvariables.Forexample,the change in
the level of urbanizationaleadingindicatormaybe usedtopredictthe change inthe demandforair
conditionersalaggingvariable.
 Two basicstepsare involvedinusingthe leadingindicatormethod:
 Identifythe appropriateleadingindicator(s).
 Establishthe relationshipbetweenthe leadingindicator(s) andthe variable tobe forecast.
Merit:
It doesnotrequire a forecastof an explanatoryvariable.
Demerit:
1. It may be difficulttofindanappropriate leadingindicator(s).

2. The lead-lagrelationshipmaynotremainstable overtime.Inview of these problemsthismethodhaslimited
use.
Econometric Method
 An advancedforecastingtool,
 It isa mathematical expressionof economicrelationshipsderivedfromeconomictheory.
 The primaryobjective of econometricanalysisistoforecastthe future behaviorof the economicvariables
incorporatedinthe model.
 Two typesof econometricmodelsare employed:the single equationmodel andthe simultaneousequation
model.
 The single equationmodel assumesthatone variable,the dependentvariable (alsoreferredtoasthe explained
variable),isinfluencedbyone ormore independentvariables(alsoreferredtoasthe explanatoryvariables).
 An example of the single equationmodel isgivenbelow:
Chain
Ratio Methods
 The potential salesof aproduct maybe estimatedbyapplyingaseriesof factorsto a measure of aggregate
demand.
 It usesa simple analytical approachtodemandestimation.
Uncertainties in Demand Forecasting
Data about past and presentmarkets: The analysisof pastand presentmarket,whichservesasthe springboardforthe
projectionexercise,maybe vitiatedbythe followinginadequaciesof data:
 Lack of standardization: Datapertainingtomarketfeatureslike product,price,quantity,cost,incomeetc.may
not reflectuniformconceptsandmeasures.
 Fewobservations: Notenoughobservationsmaybe available toconductmeaningful analysis.
 Influence of abnormal factors: Some of the observationsmaybe influencedbyabnormal factorslike waror
natural calamity.
Methodsof forecasting:Methodsusedfor demandforecastingare characterizedbyfollowinglimitations.

 Inabilitytohandle unquantifiable factors: Mostof the forecastingmethods,quantitative innature,cannot
handle unquantifiable factorswhichsometimescanbe of immense significance.
 Unrealisticassumptions: Eachforecastingmethodisbasedoncertainassumptions.Forexample,the trend
projectionmethodisbasedonthe ‘mutuallycompensationeffects’premise andthe end-usemethodisbasedon
the constancyof technical coefficients.Uncertaintyariseswhenthe assumptionsunderlyingthe chosenmethod
tendto be unrealisticanderroneous.
 Excessive datarequirement: Ingeneral,the more advancedamethod,the greaterthe datarequirement.For
example,touse aneconometricmodel one hastoforecastthe future valuesof explanatoryvariablesinorderto
projectthe explainedvariable.Clearly,predictingthe future valueof explanatoryvariablesisadifficultand
uncertainexercise.
Environmental changes: The environmentinwhichabusinessfunctionsischaracterizedbynumerousuncertainties.The
importantsourcesof uncertaintyare mentionedbelow:
 Technological changes:A technological advancementmaycreate anew product whichperformsthe same
functionmore efficientlyandeconomically,therebycuttingintothe marketforthe existingproduct.For
example,electronicwatcheshave encroachedonthe marketformechanical watches.
 Shiftingovernmentpolicy: Grantingof licensestonew companies,particularlyforeigncompanies,mayalterthe
marketsituationsignificantly.;banningthe importof acertainproductmay create a shelteredmarketforthe
existingproducers;liberalizingthe importof some productmayleadto stiff competitioninthe marketplace;
relaxationof price anddistributioncontrolsmaywidenthe marketconsiderably.
 Developmentsonthe internationalscene: Developmentsonthe internationalscene mayhave aprofoundeffect
on industries.The mostclassicexampleof recenttimesisthe OPECprice hike,whichledtonearstagnationin
the Indianautomobile industry.
 Discoveryof newsource of raw material: Discoveryof new sourcesof raw materials,particularlyhydrocarbons,
can have a significantimpactonthe marketsituationof several products.
 Vagariesof monsoon: Monsoonissomewhatunpredictable.The behaviorof monsooninfluences,directlyor
indirectly,the demandforawise range of products.
Coping With Uncertainties
 Conductanalysiswithdatabasedonuniformandstandard definitions.
 Ignore the abnormal or out-of-ordinaryobservations.
 Criticallyevaluate the assumptionsof the forecastingmethodsandchoose amethodwhichisappropriate tothe
situation.
 Adjustthe projectionsderivedfromquantitative analysisinthe lightof adue considerationof unquantifiable
influences.
 Monitorthe environmentimaginativelytoidentifyimportantchanges.
 Considerlikelyalternative scenariosandtheirimpactonmarketandcompetition.
 Conductsensitivityanalysistoassessthe impactonthe size of demandforunfavorable andfavorable variations
of the determiningfactorsfromtheirmostlikelylevels.
Market planning
 Currentmarketingsituation
- Market,Competition,Distribution,PEST.
 Opportunityandissue analysis - SWOT
 Objectives- Breakeven,%marketshare…
 Marketingstrategy- targetsegment,positioning,4Ps
 Actionprogram- Quarter1, Q2, Q3….
Technical Analysis

Technical analysisimpliesthe adequacyof the proposedplantandequipmenttoprescribednorms.Itshouldbe ensured
whetherthe requiredknow howisavailablewiththe entrepreneur.
Analysisof technical andengineeringaspectsisdone continuallywhenaprojectisbeingexaminedand formulated.
Othertypesof analysesare dependentandcloselyintertwinedwithtechnical analysis.
The followinginputsconcernedinthe projectshouldalsobe takenintoconsideration:
 Availabilityof Landandsite.
 Availabilityof Water,Power,transport,communicationfacilities.
 Availabilityof servicingfacilitieslikemachine shop,electricrepairshopetc.
 Copingwithanti-pollutionlaw.
 Availabilityof workforce.
 Availabilityof requiredrawmaterial asperquantityandquality.
 Productionand Technology,Choice of technology.
 ProductMix, Plantcapacity.
 Machineryand Equipment.
Materials and inputs
 There isan intimate relationshipbetweenthe studyof materialsandinputsandotheraspectsof project
formulationconcernedwithlocation,technology,andequipment.
 Materialsandinputsmay be classifiedinto4broadcategories:
1. Raw materials— Rawmaterials(processedand/orsemi-processed) maybe classifiedintofourtypes:
(i) agricultural products,
(ii) mineral products,
(iii) livestockandforestproducts,
(iv) marine products
2. Processedindustrial materialsand components— Processedindustrial materialsandcomponents(base metals,
semi-processedmaterials,manufacturedparts,components,andsub-assemblyrepresentanimportantinputfora
numberof industries. Instudyingthemthe followingquestionsneedtobe answered:
In the case of industrial materials,Whatare theirproperties?,How dependableare the supplies?
What isthe total requirementof the project?,What has beenthe pasttrendin prices?
What quantitywouldbe availablefromdomesticsource?,Whatisthe likelyfuturebehaviorof prices?
What quantitywouldbe availablefromforeignsources?
3. Auxiliarymaterialsand factory supplies:
In additiontothe basicraw materialsandprocessedindustrial materialsandcomponents,amanufacturingproject
requiresvariousauxiliarymaterialsandfactorysupplies,like:
Chemicals,Additives,Packagingmaterials,Paints,Varnishes,Oils,Grease,Cleaningmaterials,etc.
The requirementsof suchauxiliarymaterialsandsuppliesshouldbe takenintoaccountinthe feasibilitystudy.
4. Utilities:
A broadassessmentof utilizes(power,water,steam,fuel,etc.) maybe made atthe time of inputstudythougha
detailedassessmentcanbe made onlyafterformulatingthe projectwith respecttolocation,technology,andplant
selection.
Since the successful operationof aprojectcriticallydependsonadequate availabilityof utilitiesthe followingpoints
shouldbe raisedwhiledconductingthe inputstudy:
1. What quantitiesare required?
2. What are the sourcesof supply?
3. What wouldbe the potential availability?
4. What are the likelyshortages/bottlenecks?
5. What measuresmaybe takento augmentsupplies.

Product Mix
 The choice of productmix isguidedprimarilybymarketrequirements.
 In the productionof mostof the itemsvariationsinsize andqualityare aimedthe productionof mostof the
items,variationsinsize andqualityare aimedatsatisfyingabroadrange of customers.Forexample,production
of shoestodifferentcustomers.
 Sometimesslightvariationsinqualitycanenable acompanytoexpanditsmarketandenjoyhigherprofitability.
For example,atoiletsoapmanufacturingunitmaybyminorvariationinraw material,packaging,andsales
promotionofferahighprofitmarginsoapto consumersinupper-incomebrackets.
 While planningthe productionfacilitiesof the firm, some flexibilitywithrespecttothe productmix mustbe
sought.Suchflexibilityenablesthe firmtoalteritsproductmix in response to changingmarketconditionsand
enhancesthe powerof the firmto survive andgrow underdifferentsituations.The degree of flexibilitychosen
may be basedon a careful analysisof the additionalinvestmentrequirementsfordifferentdegreesof flexibility.
Plant Capacity
 Plantcapacityrefersto the volume ornumberof unitsthat can be manufacturedduringagivenperiod.
 Several factorshave a bearingonthe capacity decision:
 Technological requirement:Formanyindustrial projects,particularlyinprocesstype industries,thereisa
certainminimumeconomicsize determinedbythe technological factor.Forexample,acementplantshould
have a capacity of at least300 tonnesperdayin orderto use the rotary kilnmethodotherwise,ithastoemploy
the vertical shaftmethodwhichissuitable forlowercapacity.
 Market conditions:The anticipatedmarketforthe product/service hasanimportantbearingonplantcapacity.
If the marketforthe productis likelytobe verystrong,aplantof highercapacityis preferable.If the marketis
likelytobe uncertain,it mightbe advantageoustostartwitha smallercapacity.If the market,startingfroma
small base,isexpectedtogrowrapidly,the initial capacitymaybe higherthanthe initial level of demandfurther
additionstocapacitymay be affectedwiththe growthof market.
 Resourcesof the firm:The resources,bothmanagerial andfinancial,availabletoa firmdefine alimitonits
capacitydecision.Obviously,afirmcannotchoose a scale of operationsbeyonditsfinancialresourcesand
managerial capability.
Choice
of Technology
The choice of technologyisinfluencedbyavarietyof considerations:
1. Principal inputs(Rawmaterial): The choice of technologydependsonthe principal inputsavailableforthe
project.Insome cases,the raw materialsavailableinfluencesthe technologychosen.Forexample,the qualityof
limestonedetermineswhetherthe wetordry processshouldbe used fora cementplant.

2. Investmentoutlayandproductioncost: The effectof alternative technologiesof investmentoutlayand
productioncostovera periodof time shouldbe carefullyassessed.
3. Experience byotherunits: The technologyadoptedmustbe proven bysuccessfuluse byotherunits,preferably
inIndia.
4. Productmix:The technologychosenmustbe judgedintermsof the total product-mix generatedbyit,including
saleable by-products.
5. Basedon Latestdevelopments: The technologyadoptedmustbe basedonlatestdevelopmentinorderto
ensure thatthe likelihoodof technological obsolescence inthe nearfuture,atleast,isminimized.
6. Ease of absorption: The ease withwhichaparticulartechnologycanbe absorbedcan influencethe choice of
technology.Sometimesahigh-level technologymaybe beyondthe absorptivecapacityof a developingcountry
whichmay lacktrainedpersonnel tohandle thattechnology.
Machinery and Equipment
The requirementof machineryandequipmentisdependenton:
 ProductionTechnologyandPlantCapacity.
 Type of project.
 For a process-orientedindustry,like apetrochemical unit,machineryandequipmentrequiredshouldbe such
that the variousstageshave to be matchedwell.
 The choice of machineryandequipmentforamanufacturing industryissomewhatwiderasvariousmachines
can performthe same functionwithvaryingdegreesof accuracy.For example,the configurationof machines
requiredforthe manufacture of refrigeratorscouldtake variousforms.
 To determine the kindsof machineryandequipmentrequirementforamanufacturingindustry,the following
procedure maybe followed:
1. Estimate the likelylevelsof productionovertime.
2. Define the variousmachiningandotheroperations.
3. Calculate the machine hoursrequiredforeachtype of operation.
4. Selectmachineryandequipmentrequiredforeachfunction.
The equipmentrequiredforthe projectmaybe classifiedintothe followingtypes:
(i) Plantequipment,(ii) Mechanical equipment,
(iii) Electrical equipment
(iv) Internal TransportationSystem, (v) OtherMachineryandEquipment.
 In additiontothe machineryandequipment,alistshouldbe preparedof spare partsandtoolsrequired.
Thismay be dividedinto:
i.spare partsand toolsto be purchasedwithoriginal equipment
ii.spare parts and toolsrequiredforoperational wearandtear.
Constraintsin selecting machinery and equipment:Inselectingthe machineryandequipment,certainconstraintsshould
be borne in mind:
 There may be a limitedavailabilityof powertosetup an electricityintensive plantlike,forexample,alarge
electricfurnace
 There may be difficultyintransportingaheavyequipmenttoaremote location;
 Workersmay notbe able tooperate,at leastinthe initial periods,certainsophisticatedequipmentsuchas
numericallycontrolledmachines
 The importpolicyof the governmentmaypreclude the importof certaintypesof machineryandequipment.

For whom is it important to understand project finance?
Project Costing and Finance
 A large numberof companies whoare inthe businessof projectdesign,engineering,procurementand
construction,use costdata for arrivingatthe price of the projectastheyhave to participate incompetitive
biddingforsecuringfuture business.
 Cost of projectrepresentsthe total of all itemsof outlayassociatedwithaprojectwhichare supportedbylong-
termfunds.
 It isthe sumof outlaysonthe following:
- Land and site development
- Buildingandcivil works
- Plantand machinery
- Technical know-how andengineeringfees
- Expensesonforeigntechniciansandtrainingof Indiantechniciansabroad
- Miscellaneousfixedassets
- Preliminaryandcapital issue expenses
- Pre-operative expenses
- Margin moneyforworkingcapital
- Initial cashlosses:initial cashlossesare notdisclosedtomaintain the project’sattractiveness.Soaprovision
shouldbe maintainedforinitial cashlosses.
Land and site development:The costincludes:
- Basic cost of landincludingconveyanceandotheralliedcharges
- Premiumpayable onleaseholdandconveyance charges
- Cost of levellinganddevelopment
- Cost of layingapproachroads andinternal roads
- Cost of gates
- Cost of tube wells
 Buildingandcivil works:The costincludes:
- Buildingsforthe mainplantandequipment
- Buildingsforauxiliaryserviceslike steamsupply, workshops,laboratory,watersupply,etc
- Godowns,warehouses,andopenyardfacilities
- Quartersfor essential staff
- Non-factorybuildingslike canteen,guesthouses,timeoffice,excisehouse,etc
- Garages
- Sewers,drainage,etc

- Othercivil engineeringworks.
 Plantand Machinery:Itincludes:
- Cost of importedmachinery:ItincludesFOB(free onboard) value,shipping,freight,insurance cost,importduty,
clearing,loading,unloadingandtransportationcharges.
- Cost of indigenousmachinery:Itincludessakes tax,octroi,andothertaxes,if any,railwayfreightandtransport
chargesto the site
- Cost of storesand spares
- Foundationandinstallationcharges
 MiscellaneousFixedAssets:
Theyare not part of the directmanufacturingprocessmaybe referredtoas miscellaneousfixedassets. Itincludes:
- furniture,office machineryandequipment
- Tools,vehicles,railwaysiding,Expensesonprocurementof use of patents,licenses,trade marks,copyrights,etc
- Diesel generationsets,transformers,boilers
- Pipingsystem,laboratoryequipments
 Preliminaryexpensesincludes:
- Expensesincurredforidentifyingthe project,conductingmarketsurvey
- Preparingthe feasibilityreport,draftingMOA andAOA
- Incorporatingthe company
 Capital issue expensesinclude:
- Expensesof Raisingof capital frompublic
- Underwritingcommission
- Brokerage,feestomanagersandregistrars
- Printingandpostage expenses
- Advertisingandpublicityexpenses
- Listingfees
- Stampduty
 Pre-operative Expenses:Itincludes:
Expensesincurredtillthe commencementof commercial production
- Establishmentexpenses
- Rent,ratesand taxes, start-upexpenses
- Travellingexpenses,interestondeferredpayments
- Interestandcommitmentchargeson borrowings
- Insurance charges,miscellaneousexpenses
 Provisionforcontingencies
 Margin moneyforWorkingCapital: itisthat part of workingcapital requirementthatcomesfromlong-term
sources.Thisisutilizedformeetingover-runsincapital cost.Thisleadstoa workingcapital problemwhenthe
projectiscommissioned.Toavoidthisproblem, financial institutionsstipulatethata portionof the loanamount,
equal tothe marginmoneyforworkingcapital,be blockedinitiallysothatitcan be releasedwhenthe projectis
completed.
Means of Financingproject
 Share capital:Equityand Preferenceshares
 Term loans:providedbyfinancialinstitutionsandcommercial banks.Theyshow securedborrowingsfor
financingnewprojectsaswell asforthe expansion,modernization,renovation,etc.theyare available asIndian
currencyterm loans(givenforfinancingland,building,civil worksetc.) andforeigncurrencytermloans(given
for meetingthe foreigncurrencyexpenditurestowardsthe importof equipment andtechnical know-how).

 Debenture capital:Non-convertibledebenturesmaturityperiodrangingfrom5to 9 years.Convertible
debenturesare convertedwhollyorpartlyintoequityshares.Conversionperiodandpricesare announcedin
advance
 Deferredcredit
 Incentive sources
 Miscellaneoussources
Break-evenPoint
Break-evenanalysisisusedtodetermine the pointatwhichrevenue received equalsthe costsassociatedwithreceiving
the revenue.
Break-evenanalysis calculateswhatisknownasa marginof safety,the amountthatrevenuesexceed the break-even
point.Thisisthe amount thatrevenuescanfall while still stayingabove the break-evenpoint.
Break-evenanalysisisasupply-sideanalysis;itonlyanalyzesthe costsof the sales.
It doesnotanalyze howdemandmaybe affected atdifferentprice levels.
The break-evenpointisthe pointatwhichgainsequal losses.Reachingthe break-evenpointisabusiness'sfirststep
towardprofitability.
The break-evenpointforaprojectiscalculatedwithreference tothe yearwhenthe projectisexpectedtoreachits
target level of capacityutilization,whichisusuallythe thirdof the fourthoperatingyear.
1. Equity Capital
 Thisis the contributionmade bythe ownersof business,the equityshareholders,whoenjoythe rewardsand
bearthe risksof ownership.However,theirliabilities,limitedtotheircapital contribution.Fromthe pointof
viewof the issuingfilm, equitycapital offers,twoimportantadvantages:(i) Itrepresentspermanentcapital.
Hence there isno liabilityforrepayment.(ii)Itdoesnotinvolve anyfixedobligationforpaymentof dividend.
The disadvantagesof raisingfundsbywayof equitycapital are:
 The cost of equitycapital ishighbecause equitydividendisnottax-deductible expenses.
 The cost of issuingequitycapital ishigh.
2. Preference Capital
 A hybridformof financing,preference capital partakessome characteristicsof equitycapital andsome
attributesof debtcapital.
 It issimilar,toequitycapital because preference dividend,like equitydividend,isnotatax-deductible payment.
 It resemblesdebtcapital because the rate of preference dividendisfixed.
 Typically,whenpreference dividendisskippeditispayable infuture because of the cumulative feature
associatedwithit.The near-fixityof preference dividendpaymentrenderspreferencecapital somewhat
unattractive ingeneral asa source of finance.Itis,however,attractive whenthe promotersdonotwanta
reductionintheirshare:share of equityandyetthere isneedforwideningthe networthbase (networth
consistsof equityandpreference capital) tosatisfythe requirementsof financial institutions.Inadditiontothe
conventional preference shares,acompanymayissue CumulativeConvertible
 Preference Shares(CCPS).These sharescarrya dividendrate of 10 percent (which;if unpaid,cumulates) andare
compulsoryconvertible intoequitysharesbetweenthreeandfive yearsfromthe date of issue.
3. Debenture Capital
 In the lastfewyears,debenture capital hasemergedasanimportantsource for projectfinancing.
 There are three typesof debenturesthatare commonlyusedinIndia:
 Non- Convertible Debentures(NCDs),
 PartiallyConvertible Debentures(PCDs),and
 FullyConvertibleDebentures(FCDs).

 Akinto promissory,NCDsare usedbycompaniesforraisingdebtthatisgenerallyretiredoveraperiodof 5 to 10
years.Theyare securedbya charge onthe assetsof the issuingcompany.PCDsare partlyconvertible intoequity
sharesas perpre-determinedtermsof conversion.The unconvertedportionof PCDsremainslikeNCDs.
 FCDs,are convertedwhollyintoequitysharesasperpre-determinedtermsof conversion.Hence FCDsmaybe
regardedas delayedequityinstruments.
4. Rupee Term Loans
 Providedby financial institutionsandcommercial banks,rupeetermloanswhichrepresentsecuredborrowings
are a veryimportantsource forfinancingnew projectsaswell asexpansion,modernization,andrenovation
schemesof existingunits.These loansare generally repayable overaperiodof 8-10 yearswhichincludesa
moratoriumperiodof l-3years.
5. Foreign Currency Terms Loans
 Financial institutionsprovideforeigncurrencytermloansfor-meetingthe foreigncurrencyexpenditures
towardsimportof plant,machinery,equipmentandalsotowardspaymentof foreigntechnical know-howfees.
Under the general scheme,the periodical liabilitytowardsinterestandprincipal remainsinthe
currency/currenciesof the loan/andistranslatedintorupeesatthe thenprevailingrate of exchange formaking
paymentstothe financial institution.Apartfromapproachingfinancialinstitutions(whichtypicallyserveas
intermediariesbetweenforeignagenciesandIndianborrowers),companiescandirectlyobtainforeigncurrency
loansfrominternational lenders.More andmore companiesappeartobe doingso presently.
6. Euro issues
 BeginningwithReliance Industries’GlobalDepositoryReceiptsissue of approximately$150 ml in May 1992, a
numberof companieshave beenmakingeuroissues.Theyhave employedtwotypesof securities:Global
DepositoryReceipts(GDRs) andEuroconvertible Bonds(ECBs).
 DenominatedinUSdollars,aGDR isa negotiable certificate thatrepresentsthe publiclytradedlocal currency
(IndianRupee) equitysharesof anon-US(Indian) company.(Of course,in.theory,aGDR may representadebt
security;inpractice itrarelydoesso.) GDRs are issuedbythe DepositoryBank(suchasthe Bankof NewYork)
againstthe local currency shares(suchas Rupee shares) whichare deliveredtothe depository’slocal custodian
banks.GDRs trade freelyinthe overseasmarkets.
 A Euro convertible Bond(ECB) isanequity-linkeddebtsecurity.The holderof anECB has the optiontoconvertit
intoequitysharesata pre-determined conversionratioduringaspecifiedperiod.ECBsare regardedas
advantageousbythe issuingcompanybecause:
 Theycarry a lowerrate of interestcomparedtoa straightdebtsecurity,
 Theydo not leadtodilutionof earningspershare inthe nearfuture, and
 Theycarry veryfewrestrictivecovenants.
7. Deferred Credit
 Many a time the suppliersof machineryprovide deferredcreditfacilityunderwhichpaymentforthe purchase
of machineryismade overa periodof time.The interestrate ondeferredcredit andthe periodof paymentvary
rather widely.Normally,the supplierof machinerywhenhe offersdeferredcreditfacilityinsiststhatthe bank
guarantee shouldbe furnishedbythe buyer.
8. Bills Rediscounting Scheme
 Operatedbythe IDBI,the billsrediscountingscheme ismeanttopromote the sale of indigenousmachineryon
deferredpaymentbasis.Underthisscheme,the sellerrealizesthe sale proceedsbydiscountingthe billsor
promissorynotesacceptedbythe buyerwithacommercial bankwhichinturn rediscountsthemwiththe IDBI.
Thisscheme ismeantprimarilyforbalancingequipmentandmachineryrequiredforexpansion,modernization,
and replacementschemes.
9. Suppliers’ Line of Credit

 Administeredbythe ICICI,the Suppliers’Line of Creditissomewhatsimilartothe IDBI’sBill Rediscounting
Scheme.Underthisarrangement,ICICIdirectlypaystothe machinerymanufactureragainstusance billsduly
acceptedor guaranteedbythe bankof the purchaser.
10. Seed Capital Assistance
 Financial institutions,throughwhatmaybe labeledbroadlyasthe ‘SeedCapital
 Assistance scheme,seektosupplementthe resourcesof the promotersandof mediumscale industrialunits
whichare eligible forassistance fromAll-Indiafinancial institutionsand/orstate-level financial institutions.
Broadly3 schemeshave beenformulated:
(i) Special SeedCapital Assistance SchemeThe quantumof assistance underthisscheme isRs0.2 millionor20 per cent
of the projectcost,whicheverislower.Thisschemeisadministered bythe State Financial Corporations.
(ii) SeedCapital AssistanceScheme The assistance orderthisscheme isapplicabletoprojectscostingnotmore than
Rs.20 million.The assistance perprojectisrestrictedtoRs 1.5 million.The assistance isprovided byIDBIthroughstate
level financial institutions.Inspecial cases,the IDBImayprovide the assistance directly.
(iii) RiskCapital FoundationScheme Underthisscheme,the RiskCapital Foundation,anautonomousfoundationsetup
and fundedbythe IFCI,offersassistance topromotersof projectscostingbetweenRs.20millionandRs.150 million.The
ceilingonthe assistance providedbetweenRs.1.5millionandRs.4milliondependingonthe numberof applicant
promoters.
11. Government Subsidies
 Previouslythe central governmentaswell asthe state governmentsprovidedsubsidiestoindustrialunits
locatedinbackwardareas.The central subsidyhasbeendiscontinuedbutthe state subsidiescontinue.The state
subsidiesvarybetween5per centto 25 percentof the fixedcapital investmentinthe project,subjecttoa
ceilingvaryingbetweenRs0.5 millionandRs2.5 milliondependingonthe location.
12. Sales Tax Deferments and Exemptions
 To attract industries,the statesprovideincentives,interalia,in the formof salestax defermentsandsalestax
exemptions.Underthe salestax defermentscheme,the paymentof salestax onthe sale of finishedgoodsmay
be deferredfora periodrangingbetweenfivetotwelveyears.Essentially,itimpliesthatthe projectgetsan
interestfree loan,representedbythe quantumof salestax deferred,duringthe deferentperiod.
 Under the salestax exemptionscheme,some statesexemptthe paymentof salestax applicable onpurchasesof
raw materials,consumables,packing, andprocessingmaterialsfromwithinthe state whichare usedfor
manufacturingpurposes.The periodof exemptionrangesfromthree tonine yearsdependinguponthe state
and the specificlocationof the projectwithinthe state.
13. Unsecured Loans and Deposits
 Unsecuredloansare typicallyprovidedbythe promoterstofill the gapbetweenthe promoters’contribution
requiredbyfinancial institutionsandthe equitycapital subscribedbythe promoters.Theseloansare subsidiary
to the institutionalloans.The rate of interestchargeableonthese loansislessthanthe rate of interestonthe
institutional loans.Finallythese loanscannotbe takenbackwithoutthe priorapproval of financial institutions.
 Depositsfrompublic,referredtoaspublicdeposits,representunsecuredborrowingof twotothree years’
duration.Many existingcompaniesprefertoraise publicdepositsinsteadof termloansfromfinancial
institutionsbecause restrictive covenantsdonotaccompanypublicdeposits.However,itmaynotbe possible
for a newcompanyto raise publicdeposits.Further,itmaybe difficultforitto repaypublicdepositswithin
three years.
14. Foreign Currency Loans
 Apart fromrupee termloans,financial institutionsprovideforeigncurrencyloans.
 Thisassistance isnowprovidedonlyforthe importof capital equipment(asperthe liberalizedexchangerisk
managementsystem, foreigncurrencyrequiredforotherpurposeshastobe purchasedfromauthorizeddealers
at marketrates).

 On foreigncurrencyloanssanctionedunderthe general scheme,the interestrate chargedistypicallyafloating
rate as determinedbythe lenders,(the foreignagencythathasgivenaline of creditto the financial institution
for onwardlending) andthe riskof exchange rate fluctuationisbornbythe borrower.
 On foreigncurrencyloanssanctionedunderthe Exchange RiskAdministrationScheme,the principal repayment
obligationsof the borrowerare rupee tiedatthe rate of exchange prevailingonthe datesof disbursement.On
such rupee-tiedloanliability,the borrowerpaysbywayof servicinghisloanacomposite,costeveryquarter.
 The composite costconsistsof three elements:(i) the interestportionwhichisarrivedonthe basisof the
weightedaverage interestcostof the variouscomponentsof the currencypool,(ii) the spreadof the financial
institutions,and(iii) the exchangeriskpremium.The ‘composite cost’isavariable rate determinedatsix-
monthlyintervals.Ithasa floorand a cap. Both the floorand the cap as well asthe rate of interestapplicablefor
the periodisreviewedandannouncedfromtime totime.
15. Leasing and Hire Purchase Finance
 Withthe emergence of scoresof finance companiesengagedinthe businessof leasingandhire purchase
finance, itmaybe possible togeta portion,albeitasmall portion,of the assetsfinancedunderalease ora hire
purchase arrangement.Typically,aprojectisfinancedpartlybyfinancial institutionsandpartlythroughthe
resourcesraisedfromthe capital market.Hence,infinalisingthe financingscheme foraproject,youshouldbear
inmindthe norms and policiesof financial institutionsandthe guidelinesof SecuritiesExchangeBoardof India
and the requirementsof the SecuritiesContractsRegulationAct (SCRA).
16. Public Deposit
 Publicdepositshave beenapeculiarfeature orindustrialfinanceinIndia.
 Companieshave beenreceivingpublicdepositsforalongtime inorderto meettheirmedium-termandlong-
termrequirementsforfinance.Thissystemwasverypopularinthe cottontextile millsorBombay,Ahmedabad
and Sholapurandinthe teagardensor Assamand Bengal.Inrecentyears,the methodor raisingfinance
throughthe publicdepositshasagainbecome popularforvariousreasons.Ratesorinterestofferedbythe
companiesare higherthanthose offeredbybanks.Atthe same time the costof depositstothe companyisless
than the cost or borrowingsfrombanks.
 While acceptingpublicdeposits,acompanymustfollow the provisionsorthe companies Actandthe directions
issuedbythe Reserve bankof India.Accordingtothe companies(Acceptance of DepositsRules,1975 as
amendedin1984) Act,no companycan receive secure andunsecureddepositsinexcessof 10% and 25%
respectivelyof paidupshare capital plusfree reserves.The Central Governmenthaslaiddownthatnocompany
shall invite adepositunlessanadvertisement,includingastatementshowingthe financialpositionof the
company,has beenissuedinthe prescribedform.Underthe new rule,depositscanbe renewed.The rate of
interestpayable ondepositsmustnotexceed15% perannum.Inorder to repaythe depositsmaturingina
particularyear,the companymust deposit110% or the depositswithascheduledbankorinspecifiedsecurities.
17. Bank Credit
 Commercial banksinthe countryserve asthe single largestsource orshort-termfinance tobusinessfirms.They
provide itinthe formof OutrightLoans.Cash credit,andLinesof Credit.
 Unit-2 Questions
1. What typesof informationare requiredformarketanddemandanalysis?
2. Discussthe stepsinvolvedinconstructingandusinganeconometricmodel.
3. What are the sourcesof uncertaintiesindemandforecasting?Discussthem.
4. “Oftensecondaryinformationisnotadequate formarketand demandanalysis”.Comment.
5. What aspectsare consideredintechnicalanalysis?
6. What factors have a bearingonchoice of technology?

Project planning and analysis

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