Project Identification And Formulation 6xfo

PROJECT IDENTIFICATION AND FORMULATION

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Introduction 

A project may be seen as an investment activity where financial resources are expended to create capital assets that produce benefits over extended period of time.

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Project identification is the initial phase of the project development cycle. 

It begins with the conceiving of ideas or intentions to set up a project.

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These ideas are then transformed into a project.

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Project Identification 

Project Identification: Collection, compilation and analysis of data to locate potential opportunities for starting business and development of such opportunities

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Opportunity is a business concept, which if turned into a tangible product or service, by the enterprise, will result into profit. It is all about creating values

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Project Identification 

Opportunities are identified through innovation/search of business ideas. Types of innovation: 

Additive Innovation – Fully exploiting already existing resources, such as product lines extensions

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Complementary Innovation – Offers something new and introduces few changes in the structure of the business

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Breakthrough Innovation (Radical Innovation) – Changes the fundamentals of the business, creating a new industry and new avenues for extensive wealth creation

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Dimension of Project Identification Project identification cannot be complete without identifying the

characteristics of a project. Every project has three basic dimensions- inputs, outputs and social costs and benefits. 

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The input characteristics define what the project will consume in of raw materials, energy, manpower, finance and organizational setup. The output characteristics of a project define what the project will generate in the form of goods and services, employment, revenue etc., the quantity and quality of all these outputs should be clearly specified. In addition to inputs and outputs every project has an impact on the society. It inevitably affects the current equilibriums of the demand and supply in the economy. It is necessary to evaluate carefully the sacrifice, which the society will be required to make, and the benefits that will accrue to the society from a given project.

Importance of Project Identification

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It has long term consequences (make or break) Involves commitment which can not be easily reversed Ideas are put into action Projects are catalytic agents for economic development Involves creative use of resources- manpower, capital, raw materials etc. Generates value addition and build-up national capital Brings socio-cultural development Leads to development of infra-structure and environment

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Methods Of Project Identification

There are five major methods of project identification: 1.Analysis Major Development Problems

Listing ideas in a random way,  Place the problems by priority order,  Select one problem as the basis for action, 

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Contd…. 2.Analyzing National Development Objectives  Policies are instruments designed to attain stated objectives and projects are the tangible realization of these policies,  Projects are the end products of a process which begins with an analysis of social needs and gives rise to policies and plans to meet the needs, 

Techniques illustrating linkages between objectives and projects can be shown using problem tree and objective tree analysis.

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Contd…. 3.Economic Analysis  Statistical analysis of trade reports - on examine the data on the flow of imports or exports.  Study of Comparative Advantage – the study of successful replicable experience of other countries.  Analysis of Linkage – examine existing economic activities (enterprises) in view of their linkage potential so that backward and forward linkages can be maximized.

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Contd….

4.National Resource Survey 

Natural resource surveys are important sources of for identifying agricultural and mineral related development projects.

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Contd…. 5.Socio-spatial Identification 

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Approach

To

Project

Participator Approach – consultation of the community about the development needs of their area and undertake together a situation analysis of major development bottlenecks which enable to identify key projects. Area Based Functional Analysis – this approach to project identification focuses on assembling a package of complementary projects within the context of village/commune district level development plan rather than an isolated project.

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Contd…. In addition to the above five method there are two other major approaches to project identification (a) Top-down approach (b) Bottom-up approach

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Contd…. 

Top-Down Approach: Projects are identified based on demands from beyond the community.

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Bottom-Up Approach: In this approach community/beneficiaries are encouraged to identify and plan the projects themselves with or without outsiders.

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Advantages of Top-Down Approach 

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It may be a rapid response to disasters like floods, war outbreak because there is limited time and chance to consult the beneficiaries. It can be effective in providing important services like education, health, water, roads etc. It can contribute to wider national or international objectives and goals 

and therefore potentially be part of a wider benefit (as in the case of trans-boundary resources, such as climate, water or others)

Limitations of Top-Down Approach 

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Does not help in modifying strongly established ideas and beliefs of people. Assumes external individuals know better than the beneficiaries of the service. Communities have little say in planning process rendering approach devoid of human resource development. Community develops dependency syndrome on outside assistance and does not exploit their own potential. The development workers (change agents) become stumbling blocks to people-led development 

tendency to impose their own biases, etc. on people.

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Advantages of Bottom-Up Approach

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Interveners accomplish more with limited resources since people tend to safeguard what they have provided for themselves.

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Develops people’s capacity to identify problems and needs and to seek possible solutions to them.

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Provides opportunities of educating people.

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Helps people to work as a team and develop a “WE” attitude - makes project progressive and sustainable.

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Resources are effectively managed; dependence reduces, there is increased equity, initiative, ability, financial and economic discipline.

Limitations of Bottom-Up Approach

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Not always effective for projects that require urgency to implement Time-consuming and requires patience and tolerance. People sometimes dislike approach because they do not want to take responsibility for action. The agency using this approach is never in control and cannot guarantee the results it would want. The priorities of communities may not fit with national or international priorities that seek to have a broader impact

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Contd…. 

During preliminary selection the analyst should eliminate project proposals that are: technically unsound and risky;  expected to have inadequate supply of inputs;  costly in relation to benefits;  assumed over ambitious sales and profitability;  not consistent with national development objectives;  environmentally unfriendly;

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Contd…. 

By the end of the identification stage we should know: whether further detailed work is justified,  what major issue have been identified?  what project alternatives have been considered?  which of them have been rejected?  rough estimate of costs including specific for promising projects,

Project Selection / Idea Generation

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Project selection process starts with the generation of a product idea.

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In order to select the most promising project, the entrepreneur needs to generate a few ideas about the possible projects he/she can undertake.

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The project ideas can be discovered from various-internal and external sources.

Identification of investment opportunities 

Internal Sources     

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SWOT Analysis Analysing the industry Analysing the input-output relationships Analysing the labour and capital market Analysing the consumer market

External Sources     

Government Regulations Import / Export opportunities Suggestions from financial institutions Survey of social and economic resources Survey of new technology

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Project Selection / Idea Generation 

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Project ideas should in general aim at overcoming constraints to the development effort. These constraints can be: material  human or institution  meeting unsatisfied needs and demand for goods and services  foreign exchange constraints that might necessitate projects for import substitution or export promotion

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Contd…. Project ideas arise from identification of a number of different factors. A) At the micro-level project ideas emanate from:

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The identification of unsatisfied demands or needs; The existence of unused or underutilized resources; The need to remove shortages in essential materials, services or facilities that constrain the development effort; The initiative of private or public enterprise in response to incentives provided by the government; The necessity to complement or expand investments previously undertaken; The desire of local groups or organizations to enhance their economic status and improve their welfare;

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Contd…. B) At the macro-level project ideas emerge from: 

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National, sectoral, or regional development plans strategies; Constraints in the development process due to shortages of essential infrastructural facilities, problem in the balance of payments, etc. Unusual events such as droughts, flood, earthquakes, hostilities, etc; Project proposal could also originate from foreign firms; Individual inspiration, institutions, workshops development experiences of other countries; Project ideas can also originate from multilateral or bilateral development agencies; To correct social and regional inequalities.

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Select development projects

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Criteria for selecting a project        

Investment size Location of project Technology to be used Equipment Marketing Labour Working Capital Requirements Economic Viability

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Contd…. 

Investment size: Investment size depends upon the entrepreneur’s capacity to raise resources and his attitude towards economies of scale. If the project is to be financed through all-India institutions with lesser promoter’s contribution, the project cost should be at least Rs.3 to 5 crores.

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Location of project: A new entrepreneur should as far as possible locate his project in and around a state headquarters. Such a location helps to attract competent managers and facilitates liaison with the State Industrial Development Corporation, the State Electricity Board and various other agencies.

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Contd…. 

Technology to be used: It is better for a new entrepreneur to go in for a project with proven technology, which is indigenously available. It avoids the problems of foreign technical collaboration and makes life easier.

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Equipment: While selecting the equipment the advice of experienced technical consultants should be obtained. Some entrepreneurs enter into some sort of a deal with the equipment manufacturers for a ‘kickback’ and in the process sacrifice quality. This is shortsightedness and no compromise on quality should be made.

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Contd…. 

Marketing: It is advisable to go in for a product with a limited number of industrial customers. A new entrepreneur should not go into a project having cut throat competition.

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Labour: a shrewd entrepreneur should minimize unskilled and semi-skilled labor. Material handling labor can be reduced through automatic handling devices and proper buying policies.

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Contd…. 

Working Capital Requirements: the entrepreneur should avoid projects with very long operating cycle and requiring huge working capital. The lending policies of banks are unpredictable and, therefore, good margin money should be provided for. This is particularly necessary when the entrepreneur has to buy from any government agency ( advance payments) or to sell to a government agency (delayed settlement of bills).

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Economic Viability: the project should break-even on a cash basis in the first 6-8 months. It should generate profits in the first year of operations.

MARKET AND DEMAND ANALYSIS

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Market & Demand Analysis 

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An integrated approach to generate power by critical analysis of the market logistically. Gives answer to two important question: 1. What should be the total demand for the product/service. 2. What share of the market would the proposed project enjoy. 1 + 2 = Profitability of the project.

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Steps in Market & Demand Analysis

Key Step in Market & Demand Analysis and their Inter-relationship Collection of Secondary Informatio n Situational Analysis and Specification s of Objectives

Demand Forecastin g

Characterizati on of the Market

Conduct of Market Survey

Market Planning

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A. Specification of Objectives 

Get a “feel” for the relationship between the product and it’s market, the project analyst may informally talk to customers, competitors, middlemen and other in the industry.

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Look at the experience of the company to learn about the purchasing power of customer, action & strategies of competitors.

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A. Specification of Objectives  1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Objectives give answer to following questions: Who are the consumer? How many consumers are there? What do they want? Why do they want it? When do they want it? How do they want it? Where do they want it? What quality is desirable? How much can they spend? What price is acceptable?

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B. Collection Of Market Information 

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Primary Data -- information collected first hand. -- questionnaires, surveys , interviews etc. Secondary Data -- information already been collected . -- Census of India , India Year Book , Planning commission reports , Economic Survey , Industrial potential surveys , etc.

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Secondary Sources of Data   

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Indian Economic Survey Indian Basic Facts Reports of Export Working Groups on Various Industries Census of Manufacturing Industries Indian Statistical Yearbook Monthly Statistical Bulletin Annual Report of RBI Annual Reports and s of the Companies Listed on the Stock Exchange Annual Reports of the Various Associations of Manufacturers

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C. Conduct of Market Survey 

Market survey is used when secondary data is not available or not fully available.

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Contd… 

Some Problems: Heterogeneity of the Country  Multiplicity of the Languages  Design of Questionnaire 

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D. Characteristics Of Market  1. 2.

This step characterizes the market on the basis of information gathered. Demand for the products/services Market Segments     

3. 4. 5. 6. 7.

Consumer Groups Geographic Variables Demographic Variables Psychographic Variables Behavioural Variables

Price Methods of distribution and sales promotion Consumers Suppliers & Competitors Government Policy

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Forecasting 

Predicting the future

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Qualitative forecast methods 

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subjective

Quantitative forecast methods 

based on mathematical formulas

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Types of Forecasting Methods 

Depend on time frame  demand behavior  causes of behavior 

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Time Frame 

Indicates how far into the future is forecast 

Short- to mid-range forecast  

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typically encomes the immediate future daily up to two years

Long-range forecast 

usually encomes a period of time longer than two years

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Demand Behavior 

Trend 

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Random variations 

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movements in demand that do not follow a pattern

Cycle 

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a gradual, long-term up or down movement of demand

an up-and-down repetitive movement in demand

Seasonal pattern 

an up-and-down repetitive movement in demand occurring periodically

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Causes of Behavior    

Analytical Cause effect relationship basis Quantitative Explicit

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E. Demand Forecasting 

Qualitative Methods 

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These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates Used to generate forecasts if historical data are not available (e.g., introduction of new product) The important qualitative methods are:

Jury of Executive Method  Delphi Method 

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Jury of Executive Opinion Method 

Rationale 

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Approach 

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Upper-level management has best information on latest product developments and future product launches Small group of upper-level managers collectively develop forecasts – Opinion of Group

Main advantages 

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Combine knowledge and expertise from various functional areas People who have best information on future developments generate the forecasts

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Jury of Executive Opinion Method 

Main drawbacks  

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Expensive No individual responsibility for forecast quality Risk that few people dominate the group Subjective Reliability is questionable

Typical applications 

Short-term forecasting

and

medium-term

demand

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Delphi Method 

Rationale 

Eliciting the opinions of a group of experts with the help of mail survey

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Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few

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Delphi Method 

Approach

Coordinator Sends Initial Questionnair e

Each expert writes response (anonymous ) Coordinator sends updated questionnair e

Coordinat or performs analysis No

Consens us reached?

Yes

Coordinat or summarize s forecast

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Delphi Method 

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Main advantages  Generate consensus  Can forecast long-term trend without availability of historical data Main drawbacks  Slow process  Experts are not able for their responses  Little evidence that reliable long-term forecasts can be generated with Delphi or other methods Typical application  Long-term forecasting  Technology forecasting

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Time Series Projection Methods 

These methods generate forecasts on the basis of an analysis of the historical time series.

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Assume that what has occurred in the past will continue to occur in the future

Relate the forecast to only one factor - time The important time series projection methods are: 

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Trend Projection Method Exponential Smoothing Method Moving Average Method

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Trend Projection Method Advantages  It uses all observations  The straight line is derived by statistical procedure  A measure of goodness fit is available Disadvantages  

More complicated The results are valid only when certain conditions are satisfied

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Exponential Smoothing 

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Exponential smoothing, forecasts are modified in the light of observed errors. If the forecast value for year t, Ft, is less than the actual value for year t, St, the forecast for the year t+1, Ft + 1 .. Ft + 1 = Ft + α et

Where Ft + 1 = forecast for year ) α et

= smoothing parameter = error in the forecast for year t = St = Ft

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Moving Average 

Naive forecast 

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Simple moving average  

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demand in current period is used as next period’s forecast uses average demand for a fixed sequence of periods stable demand with no pronounced behavioral patterns

Weighted moving average 

weights are assigned to most recent data

According to the moving average method St + S t – 1 +…+ S t – n +1 Ft + 1 = n where Ft + 1 = forecast for the next period St = sales for the current period n = period over which averaging is done 

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Weighted Moving Average  Adjusts moving average method to more closely reflect data fluctuations n

WMAn =

 Wi Di

i=1

where

Wi = the weight for period i, between 0 and 100 percent

 W = 1.00 i

Weighted Moving Average Example MONTH

WEIGHT

August September October

DATA

17% 33% 50%

130 110 90 3

November Forecast

WMA3 = Wi Di i=1

= (0.50)(90) + (0.33)(110) + (0.17)(130) = 103.4 orders

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Causal Methods 

Causal methods seek to develop forecasts on the basis of cause-effects relationships specified in an explicit, quantitative manner.     

Chain Ratio Method Consumption Level Method End Use Method Leading Indicator Method Econometric Method

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Chain Ratio Methods 

Market Potential for heated coats in the any Market:         

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Population (U) = 280,000,000 Proportion of U that are age over 16 (A) = 75% Proportion of A that are men (M) = 50% Proportion of M that have incomes over Rs.65k (I) = 50% Proportion of I that live in cold states (C) = 50% Proportion of C that ski regularly (S) = 10% Proportion of S that are fashion conscious (F) = 30% Proportion of F that are early adopters (E) = 10% Average number of ski coats purchased per year (Y) = .5 coats Average price per coat (P) = Rs. 200

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Chain Ratio Methods 

Market Potential for heated coats in the market.: Market Sales Potential = U x Ax M x I x C x S x F x E x Y = 28 Crore x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10 x200 = Rs. 7.88 Crore

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Consumption Level Method 

This method is used for those products that are directly consumed. This method measures the consumption level on the basis of elasticity coefficients.

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Consumption Level Method Income Elasticity: This reflects the responsiveness of demand to variations in income. It is calculated as: E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1] Where E1 = Income elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year I1 = income level in the base year I2 = income level in the following year 

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Consumption Level Method Price Elasticity: This reflects the responsiveness of demand to variations in price. It is calculated as: EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1] Where EP = Price elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year P1 = price level in the base year P2 = price level in the following year 

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End Use Method Suitable for estimating demand for intermediate products  Also called as consumption coefficient method Steps 1. Identify the possible uses of the products 2. Define the consumption coefficient of the product for various uses 3. Project the output levels for the consuming industries 4. Derive the demand for the project 

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End Use Method 

This method forecasts the demand based on the consumption coefficient of the various uses of the product. Projected Demand for Indchem

Alpha Beta Kappa Gamma

Consumption Coefficient

Projected Output in Year X

Projected Demand for Indchem in Year X

2.0 1.2 0.8 0.5

10,000 15,000 20,000 30,000 Total

20,000 18,000 16,000 15,000 69,000

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Leading Indicator Method 

This method uses the changes in the leading indicators to predict the changes in the lagging indicators.

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Two basic steps: 1.

2.

Identify the appropriate leading indicator(s) Establish the relationship between the leading indicator(s) and the variable to forecast.

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Econometric Method An advanced forecasting tool, it is a mathematical expression of economic relationships derived from economic theory.  Economic variables incorporated in the model 1. Single Equation Model Dt = a0 + a1 Pt + a2 Nt 

Where Dt = demand for a certain product in year t. Pt = price of the product in year t. Nt = income in year t.

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Econometric Method 2. Simultaneous equation method GNPt = Gt + It + Ct It = a0 + a1 GNPt Ct = b0 + b1 GNPt  Where GNPt = gross national product for year t. Gt = Governmental purchase for year t. It = Gross investment for year t.

Ct= Consumption for year t.

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Econometric Method Advantages  The process sharpens the understanding of complex cause – effect relationships  This method provides basis for testing assumptions Disadvantages  It is expensive and data demanding  To forecast the behaviour of dependant variable, one needs the projected values of independent variables

Uncertainties in Demand Forecasting 

Data about past and present markets. 

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Lack of standardization:- product, price, quantity, cost, income…. Few observations Influence of abnormal factors:- war, natural calamity

Methods of forecasting   

Inability to handle unquantifiable factors Unrealistic assumptions Excessive data requirement

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Contd… 

Environmental changes Technological changes  Shift in government policy  Developments on the international scene  Discovery of new source of raw material  Vagaries of monsoon 

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Coping With Uncertainties 

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Conduct analysis with data based on uniform and standard definitions. Ignore the abnormal or out-of-ordinary observations. Critically evaluate the assumptions Adjust the projections. Monitor the environment. Consider likely alternative scenarios. Conduct sensitivity analysis

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F. Market Planning 

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(a) (b)

A good marketing plan is required in order to make a success of the venture one is thinking of starting. Conceptually the marketing planning process involves the following: Defining the Business Analyzing the Current Market (i) Market Analysis (ii) SWOT Analysis

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Contd…. (c) (d)

Objectives Marketing Strategy      

(e) (f)

Target market Segment Positioning Product Line Price Distribution Sales force , Sales promotion , and Advertising

Budgeting Implementation and Control

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Objective of Technical Analysis 

Primary Objective 

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First and foremost important objective of technical analysis is to see whether the project idea is feasible or not from technical point of view or not

Secondary Objective 

To find out the most optimal formulation of the project technology, size, location etc.

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To find out the cost of project, so that profitability can be calculated.

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Technical Analysis 

Technical analysis is based on the description of the product and specifications and also the requirements of quality standards.

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The analysis encomes available alternative technologies, selection of the most appropriate technology in of optimum combination of project components, implications of the acquisition of technology, and contractual aspects of licensing.

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Special attention is given to technical dimensions in project selection. The technology chosen should also keep in view the requirements of raw materials and other inputs in of quality and should ensure that the cost of production would be competitive.

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Activities in Technical Analysis 1. 2. 3. 4. 5. 6. 7. 8. 9.

Technology selection Material and utilities input requirements Flexibility in product-mix Plant capacity Location and size of the project Machinery and equipment Charts and Layouts Work Schedule Cost of Project

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1. Technology Selection       

Plant Capacity Material and utilities input requirements Investment Outlay and production costs Use by other units Flexibility in Product mix Latest Developments Appropriateness of technology.

2. Materials Requirements

and

Utilities

Input

Raw-materials  Processed Industrial materials and components  Auxiliary materials and factory supplies  Utilities 

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3. Product Mix Flexibility Another area to be analysed under the technical analysis is flexibility of technology and plan regarding product mix.

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4. Plant Capacity ¶ ¶ ¶ ¶

Technological requirements Input constraints Market conditions Investment cost & resources of firms

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5. Location and Site selection     

Nearness to raw-materials and market Availability of infrastructure Labour situations Government policies Other factors

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6. Machinery and Equipment  Technical analysis of a project idea should include the study of required machinery and equipment to run the project.  The machinery and technology required depends on the plant capacity and type of technology selected.

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7. Charts and Layouts  Material Flow Diagram  Production Line Diagram  Transport Layout  Utility Consumption Layout  Communication Layout  Organisation Layout  Plant Layout

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8. Work Schedule  To anticipate problems like to arise during the installation phase and suggest possible means for coping with them 

To establish the phasing of investments taking into the availability of finances

 To develop a plan operations covering the initial period (the running - in period).

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9. Cost of Project Land and site development Building and civil works Plant and machinery Technical Know-how and Engineering fees Expenses on foreign technicians and training of Indian technicians abroad  Preliminary and capital issue expenses.  Pre-operative expenses  Margin money for working capital  Initial cash losses     

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Financial Analysis The Financial Analysis, examines the viability of the project from financial or commercial considerations and indicates the return on the investments. Main Activity: 



Financial Evaluation of Project

Other Activity:   

Cost of Project Decision about sources of finance Working capital requirement.

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Financial Evaluation of Project 



Financial Evaluation is a Planning Process used to determine whether a firm’s low term investment in project is financially feasible or not. On the basis of expected inflows and outflows in future. Some of the commonly used techniques for financial analysis are as follows.  Pay-back period.  Return on Investment (ROI)  Net Present Value (NPV)  Profitability Index(PI)/Benefit Cost Ratio  Internal Rate of Return (IRR)

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Cost of Operators (from

Technical Analysis)

Revenue Cash Inflows (from Market and Demand Analysis)

Financial Cost (from Financial Analysis)

Cost Cash Outflows

Net Cash Inflows

Various Appraisal Techniques • ARR • PBP

Accept/Reject Decision

• NPV • IRR •PI etc.

PROJECT FORMULATION What is Project Formulation? Stages of Project Formulation Project Report

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What is Project Formulation? 

Taking a first look carefully and critically at the project idea

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Carefully weighing its various components

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Analysing with the assistance of specialists or consultants

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Assessment of the various aspects of an investment proposition



It is an important stage in the pre-investment phase

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Project Formulation 

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Project formulation is a systematic and logical way of developing cost effective solutions to development problems. You can learn about formulating a project by formulating projects! Therefore,  think!  put your thoughts on paper,  discuss with others, 

check facts and it may require re-writing several times,

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Stages of Project Formulation

Feasibility Analysis 2. Techno-Economic Analysis 3. Project Design and Network Analysis 4. Input Analysis 5. Financial Analysis 6. Cost-Benefit Analysis 7. Pre-Investment Analysis 1.

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1. Feasibility Analysis  



First stage in project formulation Examination to see whether to go in for a detailed investment proposal or not Screening for internal and external constraints

Conclusion could be:   

The project idea seems to be feasible The project idea is not a feasible one Unable to arrive at a conclusion for want of adequate data

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2. Techno-Economic Analysis Screens the idea toEstimate of potential of the demand for goods/services Choice of optimal technology 

This analysis gives the project a platform for preparation of detailed project design

3. Project Design and Network Analysis

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

It is the heart of the project entity



It defines the sequence of events of the project

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Time is allocated for each activity

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It is presented in a form of a network drawing

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It helps to identify project inputs, finance needed and cost-benefit profile of the project

1-100

4. Input Analysis 

Its assesses the input requirements during the construction and operation of the project

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It defines the inputs required for each activity

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Inputs include materials, human resources

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It evaluates the feasibility of the project from the point of view of the availability of necessary resources

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This aids in assessing the project cost

1-101

5. Financial Analysis 

It involves estimating the project costs, operating cost and fund requirements

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It helps in comparing various project proposals on a common scale

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Analytical tools used are discounted cash flow, cost-volumeprofit relationship and ratio analysis

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Investment decisions involve commitment of resources in future, with a long time horizon

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It needs caution and foresight in developing financial forecasts

1-102

6. Cost- Benefit Analysis 

The overall worth of a project is considered

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The project design forms the basis of evaluation

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It considers costs that all entities have to bear and the benefit connected to it

1-103

7. Pre-investment Analysis 

The results obtained in previous stages are consolidated to arrive at clear conclusions

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Helps the project-sponsoring body, the project-implementing body and the external consulting agencies to accept/reject the proposal

Constraints in Project Formulation

1-104

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Lack of a viable / feasible project idea

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Lack of realistic / achievable objectives

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Lack of necessary resources / infrastructure to convert idea into reality

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Policies of government / Legal restrictions

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Lengthy and cumbersome procedures to get finance, start business

1-105

Project Report 

It is a concise copy of detailed analysis done for the project

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An entrepreneur/expert prepares the report before the investment in project is done

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The report assesses the demand for proposed product/service, works out cost of investment and profitability on this investment

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It acts as an instrument to convince investors to invest in the project

1-106

Significance of Project Report 

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An objective without a plan is a dream. The preparation of a project report is of great significance for an entrepreneur. The project report serves the two essential functions: 

First and most important, the project report is like a road map. It describes the direction the enterprise is going in, what its goals are, where it wants to be, and how it is going to get there. It also enables an entrepreneur to know that he is proceeding in the right direction.

1-107

Contd… 

The second function of the project report is to attract lenders and investors. 





Although, it is not mandatory for the small enterprises to prepare project reports, yet it is useful and beneficial for them to prepare the project reports for various reasons. The preparation of project report is beneficial for those small enterprises, which apply for financial assistance from the financial institutions and the commercial banks. It is on the basis of project report that the financial institutions make appraisal if the enterprise requires financial assistance or not If yes, how much.

1-108

Contd…. A project report gives information on the following: 

Economic aspects – present market, scope for growth, justification for investment

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Technical aspects – technology, machinery, equipment needed

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Financial aspects – Total investment needed, entrepreneur’s contribution, cost of capital and return on capital

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Production aspects – Product details, justification for the choice of product, export worthiness

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Managerial aspects – Qualifications, experience of people needed for managerial posts

1-109

Contents of a project report 

Objectives and scope of the report

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Product characteristics (product design, specifications, quality standards, uses and applications)

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Market position and trends (current capacity for production, potential demand, export prospects, trends in import-export, price structure etc)

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Raw materials (types, quality, sources, price)

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Manufacturing (process, production schedule, technique used)

1-110

Contd…. 

Plant and machinery (types, infrastructure , cost)

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Land and building (Requirement, building construction schedule, choice of location, cost)

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Financial implications (Capital structure, fixed and working capital investment, project cost, profitability)

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Marketing channels (Trade practices, marketing and advertising strategy)

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Personnel (Requirement of staff, skilled-unskilled labour, salary and wage payment, qualifications, experience)

1-111

Contd…. 

The project report is submitted to financial institutions for grant of land and other financial concessions

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Organizations like Small Industries Service Institute (SISI) and Small Industries Development Organization (SIDO) help entrepreneurs to prepare project report

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The financial institutions ascertain from the report, whether the project can generate enough funds to repay the borrowings in stipulated time frame

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THANK YOU