PROJECT APPRAISAL

Rushi Ahuja
Generation of Ideas

Stimulating Flow of Ideas Preliminary Screening of Ideas

Following factors to be considered:
 SWOT Analysis
 Reasonableness of cost

 Clear Articulation of Objectives  Consistency with Govt. regulations

 Adequacy of Market
 Fostering a conducive culture  Availability of inputs

 Compatibility with the personality of the

Promoter

 Risk acceptability level

Tools for Idea Selection Project Rating Index

 Indentify factors
 Porter Model
 Assign weight to each factor

 Life Cycle Theory  Rate the factors on a scale

 Multiply factor weight and rating

 Experience Curve  Add the factor scores to arrive at overall
rating index

Note - For details, refer Chapter 3 of book “Projects – Planning, Analysis Selection, Financing,
Implementation and Review “ by Prasanna Chandra
Rushi Ahuja 2
Market & Demand Analysis

Key Steps in Marketing & Steps in Market Survey

 Define the target population
Demand Analysis
 Select the sampling scheme and sample size

 Situational Analysis  Develop the questionnaire

 Recruit and train the field investigators

 Collection of Secondary  Obtain information as per questionnaire from
sample of respondents
Information
 Analyze and interpret the information

 Conduct of Market Survey

Characterization of Market
 Characterization of market  Effective demand in past and present

 Breakdown of demand
 Demand Forecasting  Price

 Methods of distribution and sales promotion

 Market Planning
 Consumers

 Fostering a conducive culture  Suppliers and competition

 Government Policy

Rushi Ahuja 3
Market & Demand Analysis
Demand Forecasting

Qualitative Methods Time Series Projection Methods

These methods rely on the judgment of
experts to translate qualitative information
into quantitative estimates. Since its based
on the judgment, there is high likelihood
that it may go wrong. Following are the
important methods:
 Jury of Executive Method
 Delphi Method
These methods generate forecasts on the
basis of analysis of historical time series..
Following are the important methods:
 Trend Projection Method
 Exponential Smoothing Method
 Moving Averages Method

Casual Methods
These methods are more analytical than the above mentioned methods. These methods
seek to develop forecast based on cause and effect relationship specified in an explicit,
quantitative manner. Following are the important methods:
 Chain Ratio Method  Leading Indicator Method
 Consumption Level Method  Econometric Method
 End Use Method
Note - For details, refer Chapter 4 of book “Projects – Planning, Analysis Selection, Financing,
Implementation and Review “ by Prasanna Chandra Rushi Ahuja 4
Technical Analysis
1. Choice of Technology : Choice of technology is influenced by the following factors:
 Plant Capacity  Product Mix
 Principal Inputs  Latest Developments
 Investment Outlay and production costs  Ease of absorption
 Use by other units

2. Technical Arrangements : Satisfactory contractual arrangements should be made to obtain the

technical know how needed for the proposed production process. Following should be worked out in
detail:
 Price of the technology & mode of payment  Period of collaboration & Assistance provided
 Process and Performance guarantees  Continuing benefit of R&D work being done

3. Material and Inputs

 Raw Material  Auxiliary Materials & Factory Supplies
 Utilities  Processed Industrial Materials & Components

4. Product Mix: Choice of Product Mix is guided by the market requirements. While planning the
production facilities some flexibility in product mix should be sought

5. Plant Capacity : Following factors have bearing on the plant capacity decision:
 Technological requirement  Market conditions
 Input constraints  Resources of the firm
 Investment costs  Government Policy

Rushi Ahuja 5
Technical Analysis
6. Location and Site : Choice of site location is influenced by following factors:
 Proximity to the source of raw materials  Labour Situation
 Proximity to markets  Government Policies
 Availability of infrastructure  Other factors like climatic & living conditions

7. Machineries and Equipment : Requirement of machinery and equipment is dependent on the

production technology and plant capacity

8. Structure and Civil Works: This may be divided into 3 categories:

 Site preparation and Development
 Buildings and Structure
 Outdoor Works

9. Environmental Aspects: Following key issues should be considered in respect of

environment
 What are the types of effluents and emissions generated
 What needs to be done for proper disposal of effluents and treatment of waste
 Will the project be able to secure all the environmental clearances

10. Charts and Layouts: Charts and layouts define the scope of the project and provide the basis of
detailed engineering and estimation of investment and production costs

Note - For details, refer Chapter 5 of book Projects – Planning, Analysis

Selection, Financing, Implementation and Review by Prasanna Chandra 6
Rushi Ahuja
Financial Analysis
1. Sources of Finance: Following can be sources of finance for a project:
 Equity  Personal Funds
 Preference  Loans from friends & Relatives
 Debentures & Bonds  Private Equity
 Bank Loan  Venture Capital

2. Cost of Capital : :
 Cost of Debt – Redeemable and Irredeemable
 Cost of Preference – Redeemable and Irredeemable
 Cost of Equity – Dividend growth model & CAPM
 Overall/weighted average cost of capital

3. Investment Evaluation Criteria

Discounting Techniques Non Discounting Techniques
 Net Present Value Method  Accounting rate of return
 Profitability Index  Payback Period Method
 Internal Rate of Return

4. Estimating Cash-flows:
 Estimating Cash flows of a normal project
 Estimating cash-flows of a replacement project

Note - For detailed notes, refer to a separate handout – FM Section2 and Section3
Rushi Ahuja 7
Risk Analysis
1. Risk Adjusted Discount Rate (RADR) : In this approach, discount rate of the Project is
adjusted for Risk. Higher the risk, higher is the discount rate used for determining the NPV of the
Project. Following are the calculation steps
 Calculate RADR which is = Risk Free Rate of Return + Risk Premium
 Calculate Present Value of Cash Flows using RADR as discount rate
 The Project which gives positive NPV, should be selected

2. Certainty Equivalent Quotient (CEQ): In this approach, Cash flows of the project are adjusted
for risk instead of the discount rate. Discount rate used is the risk free rate of return instead of
weighted average cost of capital. Following are the calculation steps
 Multiply the Cash Flows with CEQ to find out risk adjusted cash flows
 Use Risk free rate of return as discounting factor for determining the NPV of the Project
 The Project which gives positive NPV, should be selected

3. Probability Theory : Since determination of cash flows of a project is based on certain

assumptions about future, which is uncertain, therefore this approach assigns a probability or likely
hood of occurrence of the cash flows. . Following are the calculation steps
 Multiply the Cash flows with their respective probability
 Add the results to calculate total Expected Value (EV)
 The Project which gives highest EV, should be selected

Rushi Ahuja 8
Risk Analysis
4. Optimistic, Most Likely and Pessimistic Estimates: In this approach, cash flows under
Optimistic, Most Likely and Pessimistic scenarios are analysed. Following are the steps:
 If it’s a optimistic scenario, then review the maximum cash flows of each project and select the
one which has the highest cash flow. (follow MaxiMax rule)
 If it’s a pessimistic scenario, then review the minimum cash flows of each project and select the
one which has the highest cash flow. (follow MaxiMin rule)

5. Standard Deviation: In this approach, risk of each project is measured using coefficient of
variation. Higher the coefficient of variation(CV), higher is the risk. Following are the calculation steps
 Calculate Standard Deviation of each project using the following formula
SD =  ∑ (X-X)2p
 Calculate coefficient of variation of each project using the following formula
CV = SD/EV
 The Project which gives lowest CV hence lower risk should be selected

6. Sensitivity Analysis: Under this approach, sensitivity of NPV of cash flows is examined under
various scenarios like increase in costs, decrease in selling price etc. It is then determined as to which
factor NPV is most sensitive to.

7. Decision Tree: it’s a diagrammatic presentation of various possible decisions. Each decision is
followed by an outcome and for each outcome Expected Value (EV)is calculated . The decision which
gives highest EV is selected.

Rushi Ahuja 9
Project Scheduling
Project Scheduling is the process of organising the activities to be under taken in a project , in a logical
sequence. Schedule activities can be logically sequenced with proper precedence relationships, as well
as leads and lags to support later development of a realistic and achievable project schedule. Project
sequencing can be performed using Network diagrams or Gnatt Charts.
Network Diagrams
Network diagrams are schematic displays of the project’s schedule activities and the logical relationships
among them, also referred to as dependencies. An example is shown below

Rushi Ahuja 10
Project Scheduling
Time Estimation
The process of estimating schedule activity durations uses information on schedule activity scope of work,
required resource types, estimated resource quantities, and resource calendars with resource
availabilities. The inputs for the estimates of schedule activity duration originate from the person or group
on the project team who is most familiar with the nature of the work content in the specific schedule
activity. Generally 3 estimates are obtained for each activity; Optimistic time (to); Most Likely Time (tm);
Pessimistic Time (tp)
Once the 3 time estimates are obtained, average time is estimated using the following formula:
te = (to + 4tm + tp)/6

Determination of critical path

Once the network diagram is ready and average time is determined next step is to determine the Earliest
Occurrence Time (EOT) and Latest Occurrence Time (LOT) of each activity, and floats. Float is the extra
time available to complete an activity. Critical path is the longest path. Critical path is marked by the
events which have zero slack

Determination of Float
Total Float = LOT of succeeding event - EOT of preceding Event - Duration of the activity
Free Float = EOT of succeeding event - EOT of preceding Event - Duration of the activity
Independent Float = EOT of succeeding event - LOT of preceding Event - Duration of the activity

Rushi Ahuja 11
Project Scheduling
Tools for evaluating Schedules
Program Evaluation & Review Technique (PERT) – This technique is used for determining variability of Project duration.
Variability is measured using standard deviation. Following steps are involved:
Determine standard deviation of duration of each activity on the critical path using the following formula:
SD of activity = (tp - to)/6
Determine standard deviation of total duration of critical path on the basis of information obtained in the above step
(Sum of SD of activities on critical path)2

Critical path Method (CPM): The critical path method is a schedule network analysis technique that is performed using the
schedule model. While PERT is used for projects characterised by uncertainty, CPM is used for relatively risk free projects.
PERT is more probabilistic in nature whereas PERT is more deterministic. Principal focus of CPM is on variations in activity
times as a result of changes in resource assignments. The main thrust of CPM analysis is on time cost relationships and it
seeks to determine the project schedule which minimises total cost.

Schedule Compression: Schedule compression shortens the project schedule without changing the project scope, to meet
schedule constraints, imposed dates, or other schedule objectives. Schedule compression techniques include:

Crashing: Schedule compression technique in which cost and schedule tradeoffs are analyzed to determine how to obtain
the greatest amount of compression for the least incremental cost. Crashing does not always produce a viable alternative
and can result in increased cost.

Fast tracking: A schedule compression technique in which phases or activities that normally would be done in sequence
are performed in parallel. An example would be to construct the foundation for a building before all the architectural
drawings are complete. Fast tracking can result in rework and increased risk. This approach can require work to be
performed without completed detailed information, such as engineering drawings. It results in trading cost for time, and
increases the risk of achieving the shortened project schedule.

Rushi Ahuja 12