PROJECT MANAGEMENT AND APPRAISAL

Unit I

Chandra Mohan Sumra

What is a Project?
A Project can be defined as a non-routine, nonrepetitive, one off undertaking, normally with distinct time, financial and technical performance goals. A Project is a single, non-repetitive enterprise. It is usually undertaken to achieve planned results within a time limit and a cost budget. Any scheme or part of a scheme, for investing resources, which can reasonably be analyzed and evaluated as an independent unit.

What is a Project?
An investment carried-out according to a plan in order to achieve a definite objective, within a certain time and which will cease when the objective is achieved. An organized unit dedicated to the attainment of a goal- the successful completion of a development project in time, within budget, in conformance with a pre-determined programme specifications Project is a specific task, with well defined objectives, which requires certain time and resources for its implementation, which can be reasonably planned and appraised in advance and also can be evaluated as an independent work unit.

Characteristic Features of a Project

Planning in Advance
Goals & Objectives Needs Resources An Investment Decision Risk and Uncertainty

A Non routine and Non repetitive activity

Characteristic Features of a Project

Work ContentTask and activities

Life-cycle Life Span Schedule Time New Entity

Performance Measurement Team Activity

Project Management
Project Management is an organized activity for the management of the project. It involves use of different tools and techniques of management during different stages of its life-cycle.
OR

Project Management is the process of managing, allocating, and timing resources to achieve a given goal in an efficient and comprehensive manner. The success of the management of a project is judged by its performance. Thus, a project must be completed within the budgeted resources (no cost over-run), within planned time (no time over-run), and it must perform as per expectations and targets (produce desired results)

Project management Vs General Management

Project Management
Responsible for overseeing change Ever changing set of tasks Dynamic organizational structure Lines of authority defined but also situational Predominantly concerned with innovation Success determined by achievement of project objectives Requires long-term detailed planning Budgeting covers several periods of time Sequence of activities unique, as per the requirement of tasks Affected by risk and uncertainty

General management
Responsible for maintaining status quo Consistently similar set of tasks Fixed organizational structure Authority defined by management structure Tasks repetitive in nature. Almost zero scope for innovation Success determined by achievement of targets Involves both long-term and shortterm planning Budgeting based on routine and historical approach Sequence of activities similar over time Limited decision variables

Evolution of Project Management #1 of 3

Evolution has been more of necessity driven than through desire In response to cope up with rapidly changing work environment in terms of technology, market place and other complexities in businesses 1900-1950s, Project management techniques were first used in Construction, Engineering, Defense. Major Contributors to Project management:
Henry Gantt, considered as forefather of Project Management for his planning and control techniques gave the idea of Gantt Charts to keep track of project schedule Frederic Taylor: WBS, Piecemeal work

Evolution of Project Management #2 of 3

1950-1970s, Emergence of Mainframe digital computers made the processing and updating of critical path networks faster and easier. American defense industry and Du Pont were early users of this technology followed by many other companies in manufacturing and construction Industry. It was during this era that Project Management was first recognized as a separate specialized function/role. Two important mathematical methods were introduced
PERT: Program evaluation review technique CPM: Critical Path Method

1970-1980s, this period saw rapid growth in Information technology and thus in Project Management applications and software. Job was still very tedious requiring too much manual feeding of data and interpreting it through large stacks of printouts. Project Managers were dependent on IT experts to use computers

Evolution of Project Management #3 of 3

1980-1990s, Project managers became far less dependent on IT experts. Now the changes in project schedules etc can be updated and implemented quickly. It was during this era that size and complexity in activities pushed organizations to look for better techniques to accomplish complex tasks. Thus techniques like PERT and CPM became very popular among Project Managers Post 1990s, globalization drastically changed the business environment across the world. Information Technology became the backbone of operations across industry. Emergence of easy to use and standardized Project management tools like Microsoft Project and many others helped developers develop industry specific customized tools of PM.

Project Life Cycle #1

Project Life Cycle #2

Level of Effort Vs Time-span during different phases of PLC
Slow start, Faster Implementation, Slow Finish Project Planning (time < 15%), Project Implementation (time > 75%), Project Clearing (time < 10%) J shaped chart, eg. Project Mars- Curiosity

A Project is a group of activities (Phases) in sequence. Each of these having a work content are spread over a duration of time which is known as its life span. These phases provide a framework for budgeting, manpower & resource allocation, and for scheduling project milestones and project reviews. The entire duration which starts with the initiation of project and ends with the project closure is called a Project Life Cycle

Project Life Cycle #3

Project Life-cycle generally defines:
What technical work to do in each phase When the deliverables are to be generated in each phase and how are they reviewed, verified, and validated Who is involved in each phase How to control and approve each phase

Phases in Project Life-Cycle:

1)Conception or Initiation Phase 2)Definition Phase 3)Project Planning Phase 4)Execution or Implementation Phase 5)Commissioning, Closing Phase

Project Life Cycle (example of s/w project) #4

Project Life Cycle- (1) Initiation Phase #5

1. Conception or Initiation Phase: In this Phase the idea of the project is explored and elaborated. Goal is to examine the feasibility of the project.
Common Techniques used in this phase are:
Creativity Brain Storming Feasibility Tests

A Business problem/opportunity is identified and various solution alternatives are defined. A Feasibility study is conducted for investigating the likelihood of each solution option After approval of solution, a Project is initiated to deliver the approved solution
This forms a Project Charter, which outlines the Objectives, Scope & Structure of new Project, and a Project Manager is appointed

From hereon Project manager recruits Project team Setting up of Project Office

Project Life Cycle- (1) Initiation Phase #6

Feasibility Analysis:
Technical Feasibility
Appropriate technology Availability of Plant and Machinery Adoptability in the given conditions

Financial Feasibility
Availability of Finance Effective utilization of funds Minimization of Costs

Managerial Feasibility
Whether the management and staff have required abilities and educational qualification Experience of management and composition of staff

Social Feasibility
Social Viable Pollution Aspect Urbanization Environmental Degradation Civic centric Environmental Hazards

Project Life Cycle- (1) Initiation Phase #7

For Identification and Screening of Project following points helps in arriving at a decision:
Scope and Potential of new enterprises Performance of existing Industries Report of input and output of different industries Social and economic report SWOT analysis

Project Life Cycle- (2) Definition Phase #8

Definition Phase: Once the Project is approved, it enters definition phase. In this phase, the requirements that are associated with a project result are specified as clearly as possible. Requirements can be categorized as:
Precondition Functional requirements Operational requirements Design limitations

Project Life Cycle- (2) Definition Phase #9

While defining project features the following aspects are considered:
Customers requirement:
Needs, Trends, Tastes, Fashion, Capacity to Pay

Product Specifications
Space & size, Quantity, Quality, Components pricing

Engineering/Technological aspects
Design, Technology, Manpower, Architecture, R & D etc

In project definition phase, it is important for all parties involved to collaborate and form Project Definition document

Project Life Cycle- (2) Definition Phase #10

Basic content and considerations in preparing a Project Definition Document are:
Raw materials Location and Site Plant Capacity Plant Layout Plant Technology Plant and machinery Manpower Electrical and instrumentation Civil engineering works Utilities Financial analysis Project Implementation schedule

Project Life Cycle- (3) Planning Phase #11

Once the Scope is defined in Project Charter, the project enters the detailed Planning Phase. By this stage, the benefits and costs of the project have been clearly documented, the objectives and scope have been defined, the project team has been appointed and a formal project office environment established. Planning is carried out regarding:
Project plan (WBS, outline of activities etc) Resource plan Financial plan Quality plan Risk plan Acceptance plan Communications plan Procurement plan

Project Life Cycle- (3) Planning Phase #12

Project Appraisal is carried out in planning phase. It involves detailed in-depth analysis of the results of a project. Appraisal is carried out taking into consideration following aspects:
Technical Appraisal: To examine the technical feasibility of the project based on technical parameters of the project as given under:
Location Site Technology Layout Process of Production Product Mix Plant Capacity Consultants

Project Life Cycle- (3) Planning Phase #13

Market Appraisal: To work out estimates of demand has been properly worked out and fall within the acceptable limits. In includes:
Estimates of present and future demand Estimates of present and future price Method of sale and distribution Competitors and extent of competition Prospective consumers, their social and economic background, consumption habits etc

Managerial Appraisal: To test the suitability and compatibility of the management with the project. Aspects to be examined include:
Type of management Strengths of management in terms of background and experience, integrity, reliability etc Personnel policies like recruitment, training, compensation etc Organizational set-up like authority, systems and procedures etc

Project Life Cycle- (3) Planning Phase #14

Financial Appraisal: Objective is to ascertain whether adequate arrangement has been made to meet the financial requirement of the project, capital structure designed is appropriate, appropriate sources of funds have been identified. Funds shall be raised from appropriate sources, at appropriate time and at minimum cost. Various aspects of appraisal are:
Proper estimation of project costs (land, rights, plant, machinery, working capital, contingencies etc) Suitability of Capital structure designed, considering the aspects of risk, return and control Identification of most appropriate sources of funds Proper determination of costs of funds Arrangement made for meeting the working capital requirements etc

Project Life Cycle- (3) Planning Phase #15

Economic Appraisal: To ascertain its economic viability, i.e. adequacy of rate of return on capital employed as well as the cash flows to cover the cost of funds and provide for payment of dividend to shareholders and also maintain future growth of the enterprise. It includes:
Estimation of sales revenue Estimation of cost of production Estimation of surplus generated from the above Element of risk and uncertainty involved Tax factor Rate of return on investment Expected cash flows

Commonly used techniques for economic appraisal include, pay-back period, accounting rate of return, IRR, NPV, net foreign exchange flow, risk and inflation adjusted rate of return etc

Project Life Cycle- (3) Planning Phase #16

Environmental Appraisal: Objective is to ensure that project meets the requirements of statutes, regulations and guidelines for the protection and preservation of environment. Particular care is required in this respect in case of projects using scarce natural resources and likely to cause pollution and environmental hazards. Social (Cost Benefit appraisal): To assess the desirability and utility of the project from social point of view. This appraisal is more important in case of projects related to development of rural or backward areas, social welfare (employment opportunities, provision of essential commodities, education, healthcare), exports oriented, projects involving significant usage of foreign exchange and technology. International development and financial institutions like World Bank, IMF, UNIDO etc insist on such appraisal for projects assisted by them.

Project Life Cycle- (3) Planning Phase #17

Project Clearance and Approval: Before a project can be taken for Implementation, it requires clearance and approval. Approval takes into consideration all the appraisal exercises undertaken.

Project Life Cycle- (4) Implementation Phase #18

This phase involves the execution of tasks and activities listed in project plan. During execution deliverables are checked for changes, risks and issues, the review of deliverable quality and measurement of deliverable against the acceptance criteria. In this phase deliverables are physically constructed and presented to client. A number of management processes are also undertaken to ensure that the project proceeds as planned:
Build deliverables: Different models my be used

Project Life Cycle- (4) Implementation Phase #19

Monitor and control Cost management Quality management Risk management Issue management Change management Procurement management Acceptance management Communication management Internal Authority External Authority

Project Life Cycle- (4) Implementation Phase #20

Preliminary preparation for Project Implementation:
Project Organisation should be setup A network chart of project activity should be prepared for effective monitoring and control over the activities Project information team should be set up for monitoring and supervision Delegation of authority and responsibility at different levels in project organisation

Stages in Project Implementation:

Preparation of engineering design Negotiation & contracting Installation and construction work Recruitment, Training of Personnel Planned Commission

Project Life Cycle- (5) Closing Phase #21

It involves releasing the final deliverables to the customer, handing over project documentation, terminating supplier contracts, releasing project resources and communicating the closure of the project to all stakeholders. This phase involves smooth transition of authority over project from project team to client team. Project audit and Ex-post evaluation of ever aspect and stage of project is carried out.

Project Appraisal
An entrepreneur or a manager has to make a decision whether to invest in a particular project or not. For that a thorough Project or Financial appraisal is required. This process is also called as:
Capital expenditure decision methods Long term decision methods Long term investment decision methods Capital expenditure planning methods Capital Budgeting Methods

These methods are applied to evaluate the projected return against the projected investment to determine financial viability of the projects under consideration Points of consideration under Project Appraisal:
Project reports are estimates Risk and uncertainty factor Unforeseen situation

Project Appraisal
Capital Budgeting: It is mainly a decision-making process for investment in assets that have long-term implication, affect the future growth and profitability of the firm, and basic composition and assets-mix of the firm. Basic objective of capital budgeting is to select those long-term investment projects that are expected to make maximum contribution to the wealth of shareholders in the long run. Problems in Capital Budgeting
Future Uncertainty Time Element Measurement Problem

Project Appraisal
Principles of Project Appraisal (Capital Budgeting):
Search for investment opportunities Long-term capital planning Short-term capital planning Ranking of investment proposals Selection of investment proposals Check on authorized outlays Authorization Ex-post evaluation Retirement and disposal Economics of capital budgeting

Project Appraisal
Techniques of Project Appraisal:
Payback Technique: It measures the length of time it takes a company to recover in cash its initial investment
Payback period = Initial investment/cash inflows It is the length of the time period required by the project to return the investment disregarding the salvage value Cash inflows in this method are usually after tax, hence PAT Helps in estimation of exposure to risk This method is easy to calculate but ignores the timing of the cash inflows. Also, it doesnt take into account the duration of a project

Project Appraisal
Example 1: ABC Inc. is considering a project with investment requirement of Rs 4,00,000. Estimated life of project is 8 years with no salvage value. Profit before depreciation and taxes is estimated to be Rs 1,50,000. Calculate the payback period if tax rate is 30%. Example 2: Crystal investors is considering a project costing Rs 10,00,000. The installation cost of the project is Rs 25,000. Life expectation of project is 7 yrs with salvage value of Rs 1,25,000. The estimated annual cash flows before depreciation and tax are Rs 2,00,000. Calculate the payback period if tax rate is 50%

Project Appraisal
Techniques of Project Appraisal:
NPV (Net Present Value): This method takes into consideration time value of money as well. It helps in comparison of projects with different costs, different cash flows, and different service lives. Calculation of NPV requires net cash inflows, cash outflows, and companys required rate of return.
Required rate of return is used as discount rate in NPV calculation Generally Cost of Capital is used as Req. rate of return Sometimes required rate of return is calculated by adding risk factor in cost of capital, to compensate for uncertainity Decision criteria in NPV method: If NPV > 0, accept the project; If NPV is < 0, reject the project

Project Appraisal
NPV = C(0) + C(1)/(1+r) + C(2)/(1+r)2 + . + C(n)/(1+r)n Example1: Find NPV of a Project with net investment of Rs 40,000 and net cash inflows as given under. Assume cost of capital for company to be 10%.
Year Net Cash Flows

1
2 3

22,000
18,000 15,000

Project Appraisal
Example2: A company is considering an investment proposal of capital outlay of Rs 1,00,000. The life of the project is 6 years. Tax rate is 40%. Expected cash flows before depreciation and Tax are as follows:
Year 1 2 3 4 Cash Flow before Depreciation and Tax 20,000 22,000 28,000 30,000

5
6

40,000
40,000

Project Appraisal
Year Cash Depre inflow ciatio before n D&T Cash Tax inflow before Tax Cash inflow after Tax Total Cash Inflow Disco unt factor Disco unted cash inflow

1 2

Project Appraisal
Techniques of Project Appraisal:
IRR (Internal Rate of Return): It determines the interest yield of the proposed capital project at which the net present value equals zero, or PV of net cash inflows equals the investment. If the IRR is greater than the companys required rate of return, the project may be accepted. NPV = C(0) + C(1)/(1+r) + C(2)/(1+r)2 + + C(n)/(1+r)n IRR can be calculated by setting NPV as zero in above equation and thus finding value of r.

Project Appraisal
Points of consideration for IRR:
It gives a comparitive ranking of projects by their overall rates of return, rather than their NPV IRR does not consider cost of capital, and cant compare projects with different durations

Example1: Assume Company XYZ must decide whether to purchase a piece of factory equipment for $300,000. The equipment would only last three years, but it is expected to generate $150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%

Managing Risks in Project

A Risk is an event that may happen, and if it does it has negative or positive impact on project. A risk must also have a probability above 0% Risk management planning is carried out in four stages. They are:
Risk Identification Risk Quantification Risk Response Risk Monitoring and Control

Managing Risks in Project

1. Risk Identification: Identification of probable risks. Approach used is a combination of brainstorming and reviewing of standard probable risks. There may be business risks and generic risks. Risk is defined in two parts:
Cause of the situation Impact of the risk

2. Risk Quantification: Quantification is done along two dimensions; Probability of occurrence of a risk, and Impact of the risk.

Managing Risks in Project

By using a Matrix, a priority can be established: Medium Critical

R I S K

Low

High

IMPACT

Managing Risks in Project

3. Risk Response: A risk can be handled in four ways:
Avoid the risk Transfer the risk Mitigate the risk Accept the risk

4. Risk Monitoring and Control: Final step is to continually monitor risks to identify any changes in the status, or if they turn into an issue. Regular risk reviews are held, to identify actions outstanding, risk probability and impact, remove risks that have passed, and identify new risks

Managing Risks in Project

Benefits of identification in Projects:
Lowering cost and confusion Prioritization and Stakeholder support Input from portfolio management Mitigation Setting expectations and establishing reserves Communication and Control

Project Risk Planning: (Risk planning in project)

Risk should be primary driver for project selection Project planning and definition are the foundation to controlling risk Risk management should be maintained in Project Risk plan

Any Questions ???