JSPM Group of Institutes

Session Objectives
Course: Civil Engineering

Project Management and Engineering Economics

UNIT VI

Session Session Objective

45 To know than on which basis project is evaluating?

To study the economical, social, environmental and legal aspect criteria of

46
project.

47 Study methods of evaluations to project financially.

48
Concept of break even analysis for project.
49

50
What is feasibility of Project and on which basis feasibility is counter?
51

52 Preparation of Detailed Project Report (DPR).

53 What is Project management consultant? And role of PMC.

 Project appraisal

6.1 Introduction:

A project can be defined as any task or work which has a definable beginning
and end which may consist of many well defined interrelated activities to achieve a
predetermined objective. To achieve these objective resources such as man, material,
machines are required and to all of which money is essential.

A project, therefore, constitute of three well defined elements as given below:

a) Activities: These are carried out in a particular technology sequence. They may
be dependant or independent, and have to be carried out subsequently. Normally,
cost and time are associated with activity.
b) Resources: Five major resources are man, material, machinery, money and time.
Proper co-ordination of these resources is necessary for economic completion of
the project in optimum period.
c) Condition: There may be some conditions and restrictions under which the
project has to be carried out. The work should be completed in well defined
condition and restrictions.

A project can therefore be a combination of different processes consisting of

activities. Proper management of all the activities and resources leads to success of a
project.

Project appraisal also known as feasibility report, generally it is prepared before

starting any project. Then only updating the feasibility report at the time of implementation
of project is required. Project appraisal is prepared for techno-economic analysis of entire
project and the total evaluation of project so that all the activity regarding project can
planned and implement effectively.

Development projects impose a series of costs and benefits on recipient

communities or countries. Those costs and benefits can be social, environmental, or
economic in nature, but may often involve all three. Public investment typically occurs
through the selection, design and implementation of specific projects to achieve the goals of
 policy. Why are some project proposals accepted and rejected, and how? What are the
considerations in appraisal other than the economic rate of return? How are questions of
environmental impact, welfare distribution and risk taken into account? In addition to being
financially viable, a development project cannot usually be considered acceptable unless it is
economically, technically and institutionally sound. It should be the least-cost feasible
solution to the problem being solved and should expect to produce net economic and/or
social benefits. For example, irrigation projects may facilitate the growing of cash crops in
one locality, but cause water shortages, and hence economic, social and environmental
pressures in another.

Appraisal is the analysis of a proposed project to determine its merit and

acceptability in accordance with established criteria. This is the final step before a project is
agreed for financing. It checks that the project is feasible against the situation on the ground
that the objectives set remain appropriate and that costs are reasonable.

The purpose of this module is to give a theoretical and applied background to

project and program appraisal techniques, including technical analysis, financial and
economic analysis, impact assessment and risk analysis.

6.2 Types of Appraisal

6.2.1 Technical Feasibility

The technical feasibility assessment is focused on gaining an understanding of the

present technical resources of the organization and their applicability to the expected
needs of the proposed system. It is an evaluation of the hardware and software and how it
meets the need of the proposed system.

6.2.2 Economic Feasibility

The purpose of the economic feasibility assessment is to determine the positive

economic benefits to the organization that the proposed system will provide. It includes
 quantification and identification of all the benefits expected. This assessment typically
involves a cost/ benefits analysis.

6.2.3 Social Appraisal

A social appraisal reviews the project design and the process of project identification
through to implementation and monitoring, from a social perspective. Particular attention
is paid to the likely impact of the project on different stakeholders, their opportunities for
participation, and the projects contribution to poverty reduction.

6.2.4 Legal Feasibility

It determines whether the proposed system conflicts with legal requirements, e.g. a
data processing system must comply with the local Data Protection Acts.

6.3 Benefit cost analysis

Benefit-cost analysis (BCA) is a technique for evaluating a project or investment

by comparing the economic benefits with the economic costs of the activity. Benefit-cost
analysis has several objectives. First, BCA can be used to evaluate the economic merit of a
project. Second the results from a series of benefit-cost analyses can be used to compare
competing projects. BCA can be used to assess business decisions, to examine the worth of
public investments, or to assess the wisdom of using natural resources or altering
environmental conditions. Ultimately, BCA aims to examine potential actions with the
objective of increasing social welfare.

Regardless of the aim, all benefit-cost analyses have several properties in

common. A BCA begins with a problem to be solved. For example, a community may have
the goal of alleviating congestion on roads in an area. Various projects that might solve the
particular problem are then identified. As an example, alternative projects to alleviate road
congestion in an area might include a new highway, a public bus system, or a light rail
system. The costs and benefits of these projects would be identified, calculated, and
compared. Decisions are typically not made solely on the basis of BCA, but BCA is useful
 and sometimes required by law. Without a doubt, results from a BCA can be used to raise
the level of public debate surrounding a project.

Whenever the benefits and costs used in a benefit-cost analysis occur in the
future, it is important to discount these future values to account for their present value. If the
interest rate is r, then the following formula can be used to find the present value (PV) of an
amount (Pt) received at some time t in the future:

Pt
PV =
(1+r )t

PV is the present value of the amount invested;

Pt is the dollar value of the future amount in time t;
r is the discount rate; and
t is the year in which Pt is realized.

6.4 Net present value (NPV)

The net present value (NPV) is the current value of all project net benefits. Net
benefits are simply the sum of benefits minus costs. The sum is discounted at the discount
rate. Using this method, if the project has a NPV greater than zero then it appears to be a
good candidate for implementation. The formula used to calculate the NPV is:

n
Ct
NPV = t
Initial investment
t=1 (1+r )

Where, Ct is the cash flow at the end of t, n is the project, and r is the discount
rate.

EX.6.1: Calculate the NPV for the construction project using following data,

Year 0 1 2 3 4 5

Benefits (Rs) 10,00,000 2,00,000 2,00,000 3,00,000 3,00,000 3,50,000

 The cost of capital, r, for the firm is 10%.

Solution:

NPV,

1.10


0

1.10


1

1.10


2

1.10


3

1.10


4

1.10



10,00,000
NPV =
 NPV =Rs .5,273

Benefit-cost ratio (BCR)

The benefit-cost ratio (BCR) is calculated as the NPV of benefits divided by the NPV of costs:
n

Bt
(1+r )t
t =1
BCR=
I

Where Bt is the benefit in time t and I is the cost in time t. If the BCR exceeds one, then the
project might be accepted.

EX 6.2: Calculate the Benefit cost ratio for the construction project; consider the project
which is being evaluated by a firm that has a cost of capital of 12%. Initial
Investment of the project is Rs. 1,00,000.
Year 1 2 3 4

Benefits (Rs) 25,000 40,000 40,000 50,000

Solution:

The benefit cost ratio measures for this project are:

 1.12


1

1.12


2

1.12


3

1.12


4

25,000

BCR=

NBCR = BCR 1 = 0.145

6.5 Internal rate of return (IRR)

The internal rate of return (IRR) is the maximum interest that could be paid for
the project resources, leaving enough money to cover investment and operating costs, which
would still allow the investor to break even. In other words, the IRR is the discount rate for
which the present value of total benefits equals the present value of total costs:

PV (Benefits) - PV (Costs) = 0.

The internal rate of return (IRR) of a project is the discount rate which makes its
NPV equal to zero. Put differently, it is the discount rate which equates the present value of
future cash flows with the initial investment. It is the value of r in the following equation:

n
Ct
Investment= t
t =1 (1+ r)

Where, Ct is the cash flow at the end of t, n is the life of the project, and r is the
internal rate of return (IRR).
 In the NPV calculation we assume that the discount rate (cost of capital) is
known and determine the NPV. In the IRR calculation, we set the NPV equal to zero and
determine the discount rate that satisfies the condition.

In general, Accept: If the IRR is greater than the cost of capital

Reject: If the IRR is less than the cost of capital

EX 6.3: Calculate the IRR for the construction project; consider the cash flow of the
project is as follows,
Year 0 1 2 3 4

Cash flow (Rs) (10000) 30,000 30,000 40,000 45,000

Solution:
The IRR is the value of r which satisfies the following equation:
1+r


1

1+r


2

1+r


3

1+r



30,000
100,000=

The calculation of r involves a process of trial and error.try r=15%.

 1.15


1

1.15


2

1.15


3

1.15



30,000
100,802=

This value is slightly higher than the target value 1, 00,000. So we increase the r=16%
1.16


1

1.16


2

1.16


3

1.16



30,000
98,641=

Since this value is less than 1, 00,000, we conclude that the r lies between 15-16%.
1. Determination of the NPV for the two closet rates of return.
(NPV/15%) 802
(NPV/15%) 802
 2. Find the sum of absolute values of the NPV obtained.
802+1359= 2,161
3. Calculate the ratio of NPV of the smaller discount rate obtained in step 1 to the sum
obtained in step 2
802/2161=0.37
4. Add the number obtained in step 3 to the smaller discount rate:
15+0.37=15.37%
6.6 Payback Period

The payback period is the length of time required to recover the initial cash outlay
on the project. According to the payback criterion, the shorter the payback period, the more
desirable is the project.

Advantages of payback period;

It is simple, both in concept and application. It does not have tedious calculations
and has few hidden assumptions.

It is rough and ready method for dealing with risk. It favors the project which
gives the substantial cash flow at earlier years. The payback criteria may wipe out
the future risk.

Since it emphasis earlier cash inflows, it may be a sensible criterion when the firm
is pressed with problems of liquidity.

Limitations of payback period;

It fails to evaluate the time value of the money. It does not consider the suitable
discounting, which violates the financial analysis principle.

It ignores the cash flow beyond the payback period. This leads to discrimination
against projects which generate substantial cash inflows in later year.

It measures of projects capital recovery, not profitability.

6.7 Break-even analysis

 Break-even analysis is a technique widely used by production management and
management accountants. It is based on categorizing production costs between those which
are "variable" (costs that change when the production output changes) and those that are
"fixed" (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to
determine the level of sales volume, sales value or production at which the business makes
neither a profit nor a loss (the "break-even point").

6.7.1 The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of costs at

various levels of activity shown on the same chart as the variation of income (or sales,
revenue) with the same variation in activity. The point at which neither profit nor loss is
made is known as the "break-even point" and is represented on the chart below by the
intersection of the two lines:

In the diagram above, the line OA represents the variation of income at varying
levels of production activity ("output"). OB represents the total fixed costs in the
business. As output increases, variable costs are incurred, meaning that total costs (fixed
+ variable) also increase. At low levels of output, Costs are greater than Income. At the
 point of intersection, P, costs are exactly equal to income, and hence neither profit nor
loss is made.

6.7.2 Fixed Costs

Fixed costs are those business costs that are not directly related to the level of
production or output. In other words, even if the business has a zero output or high
output, the level of fixed costs will remain broadly the same. In the long term fixed costs
can alter - perhaps as a result of investment in production capacity (e.g. adding a new
factory unit) or through the growth in overheads required to support a larger, more
complex business.

Examples of fixed costs:

- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs

6.7.3 Variable Costs

Variable costs are those costs which vary directly with the level of output. They
represent payment output-related inputs such as raw materials, direct labor, fuel and
revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs and "Indirect" variable
costs.

Direct variable costs are those which can be directly attributable to the production of
a particular product or service and allocated to a particular cost centre. Raw materials and
the wages those working on the production line are good examples.

Indirect variable costs cannot be directly attributable to production but they do vary
with output. These include depreciation (where it is calculated related to output - e.g.
machine hours), maintenance and certain labor costs.
 6.7.4 Semi-Variable Costs

Whilst the distinction between fixed and variable costs is a convenient way of
categorizing business costs, in reality there are some costs which are fixed in nature but
which increase when output reaches certain levels. These are largely related to the overall
"scale" and/or complexity of the business. For example, when a business has relatively
low levels of output or sales, it may not require costs associated with functions such as
human resource management or a fully-resourced finance department. However, as the
scale of the business grows (e.g. output, number people employed, number and
complexity of transactions) then more resources are required. If production rises suddenly
then some short-term increase in warehousing and/or transport may be required. In these
circumstances, we say that part of the cost is variable and part fixed.

6.8 Project Feasibility Report

Feasibility report is made at the initial stage of the project. After that only timely
updating are made in the report. The viability of the project mainly depends upon the
following analysis:

1. Technical Appraisal
Whether pre-requisites for the success of project considered?
Good choices with regard to location, size, process, machines etc.
2. Economic Appraisal
Social cost -benefit analysis
Direct economic benefits and costs in terms of shadow prices
Impact of project on distribution of income in society
Impact on level of savings and investments in society
Impact on fulfillment of national goals :-
(1) Self sufficiency (2) Employment and (3) Social order
3. Ecological Appraisal
Impact of project on quality of :- Air, Water, Noise, Vegetation, Human
life
Major projects ,such as these, cause environmental damage
Power plants
Irrigation schemes
Industries like bulk drugs, chemicals and leather processing.
Likely damage & the cost of restoration
 4. Financial Appraisal
Whether the project is financially viable?
Servicing debt
Meeting return expectations

Note: Project Appraisal Criteria

Technical: will the project work? Has due attention been paid to technical factors
affecting the project design? Given the human and material resources identified, can the
project activities be undertaken and outputs achieved within the time available and to the
required standards?
Financial: can the project be financed? Will there be sufficient funds to cover the
expenditure requirements during the life of the project?
Economic: will the nation and society at large be better off as a result of the project? Will
the project benefits be greater than the project costs over the life of the investment when
account is taken of time (namely, is the Net Present Value of the project positive at the
test discount rate)?
Social and gender: what will be the effect of the project on different groups, at
individual, household and community levels? How will the project impact on women and
men? How will they participate in various stages of the project cycle? Will the social
benefits of the project be greater than the social costs over the life of the investment when
account is taken of time?
Institutional: are the supporting institutions in place? Can they operate effectively within
the existing legislative and policy environment? Has the project identified opportunities
for institutional strengthening and capacity building?
Environmental: will the project have any adverse effects on the environment? Have
medial measures been included in the project design?
Political: will the project be compatible with government policy, at both central and
regional levels?
Sustainability and risk: will the project be exposed to any undue risks? Will the project
benefits be sustainable beyond the life of the project?

6.8.1 Technical Appraisal

 Clearly, every project must be technically feasible. Technical Appraisal provides a
comprehensive review of all technical aspects of the project such as rendering judgment
on merits of technical proposals and operating costs.

For adopting the methods of construction depends on the availability of the

resources and detailed evaluation of alternate methods. There are number of new
technology introduced in construction field, following point should be taken into
consideration,

i. It is expensive
ii. It has high degree of automation.
iii. It requires highly trained personnel and sophisticated management culture.

From these criteria we can evaluate the acceptability of new technology for the
particular projects.

Feasibility study is most important for selecting the site for construction project.
There is number of for selecting the project site is as follows:

i. Availability of land, soil characteristics and cost of land

ii. Approach to site.
iii. Transportation and availability of material.
iv. Availability of manpower.
v. Availability of facilities such as water supply, electricity, drainage etc.
vi. Acceptance of project by local bodies.

6.8.2 Financial appraisal

Financial analysis of feasibility study is as follows:

i. Estimation of capital cost requirement

ii. Source of financing

(i) Capital cost of project:

It is the estimated cost of the project upon which the financing of the project is
decides. Change in capital cost also changes the interest, depreciation etc. Overall project
 starting planning is depends upon the capital cost and financing of project. The delay may
overrun the capital cost of project.

Over estimation of the project cost leads to burden on financial resources. The fund
plan of a project is as follows:

a) Engineering and project management cost.

b) Lump sum payment for technology cost.
c) Engineering fee.
d) Management and supervision during construction.
e) Enabling works.
f) Construction equipment used.
g) Commissioning expenditure.
h) Miscellaneous fixed assets.
i) Preliminary and pre-operative expenses.
j) Provision of contingencies.
k) Operating cost.

(ii) Sources of financing:

There are two sources are available for financing in project i.e. internal sources and
external sources. Internal sources are used for small projects and external sources are
used for large projects. The financed to the project should be equity and long-term debts.

6.8.3 Economic appraisal

Economic analysis is done at the feasibility stage of the project to check the
economic viability of the project. Sometimes project may technically feasible but
economically unviable.

The assessment of the economic feasibility is done by following methods:

a) Payback period method

b) Return on investment method
c) Net present value method
d) Internal rate of return method
e) Benefit cost ratio method
 With the help of these methods economical assessment is done, it is also referred to
the social cost and benefit of the project. It is mostly used in evaluating the public sector
project.

6.8.4 Ecological appraisal

Ecological appraisal is required for the major projects which have significant
ecological implications like power plants and irrigation schemes, and environmentally
polluting industries such as drug, chemical and leather processing industries.

Pollution control laws are stringent compelling the process industries to invest a
significant percentage of their total capital in effluent treatment and disposal. The
problem of effluent disposal varies from industry to industry.

During feasibility study, guidelines of central or state pollution control boards are to
be considered and most suitable treatment schemes should be allocated.
 Preliminar
y Work
No

Terminate

Ye
s

Analysis

No
Evaluatio
Terminate

Ye
s

Figure1. Schematic diagram for feasibility study

6.9 The Role of Project Management Consultants

The Project Management Consultancy has a wide variety of roles to play during
the construction process. Construction project gives benefits to the Customer / Client in
terms of satisfaction and it consists of business development, profit, resources utilization,
etc. Because of this consultancy plays a multifaceted part in the construction project, and is
 usually involved in the project from the projects inception to its completion. It is important
to fully understand Project Management Consultancy and authority. Doing so ensures that
the Consultancy can be fully maximized on each construction project. Normally the job is
managed by the Project Manager and supervised by the Construction Manager, and allied
team of design engineer, construction engineer or project architect. Efficiency in
Management is needed to gain a higher level in competitiveness. Every construction project
is different i.e. Unique, every construction project demands the full attention,
professionalism and energy of its project team, every construction project depends upon an
experienced leader to make it happen. The construction industry in India has grown very fast
with the construction of new projects. Due to the rapid expansion in the construction
industry, the services provided by the Consultancy need to be improved in terms of
performance and quality of work to meet the construction project goals and objective and
also the clients satisfaction. Paper highlights the case study for research of dealing the Mega
Industrial Projects by PMC through their role and responsibility during project life cycle
from Project Initiation Phase and A/E Selection Schematic Design Phase - Design
Development Phase - Construction Documents Phase - Bidding and Award Phase -
Construction Phase - Closeout. In all phases PMC manage the project by various services
like Scheduling, Cost budgeting, Value engineering, Risk Identifying, Monitoring &
controlling, Time line optimization, Resources Allocations, etc.

6.9.1 Need For Consultancy:

1. Shortage of specialized staff with the Industry since at present the supervisory
staff conversant with latest construction technique is not available in bulk.

2. Also, in general, there is a shortage of supervisors who can be associated with a

single project.

3. Faster execution of projects in short time.

6.9.2 Role of Project Management consultancy

 1. Pre-Construction Management
From the moment we take up a project, we chalk out a roadmap for our
customers, taking ownership of the entire project, right from its budding stages. This
process includes advising, monitoring and reporting on Pre-Construction activities of
the project. Masters initiates the project by preparing a project execution plan that
will set out the cost, time and quality objectives of the project, and the systems and
procedures that will be used to achieve these objectives. The overall objective of the
Pre-Construction process is to improve efficiency, reduce cost and time (by providing
clear briefings, pre-planning meetings, workshops and resource allocation) and value
maximization (by managing the supply chain, making timely decisions and operating
in a pro-active and robust environment).

Phases of Pre Construction Management

o Project definition

o Project administration

o Appointment of architect and consultants

o Design management & coordination

o Procurement management/Tender and Bid management

o Planning management/ Forecasting management

o Cost management

o Risk management

o Value management
 2. Construction & Installation Management
Masters starts the construction management process during the preliminary
design stage when project planning milestones are established, construction concepts
are developed, and the overall plan is prepared.

As a part of Project Management Consultancy, during the construction period,

Masters will prepare a construction management strategy, procedure and manual and
undertake Construction Process Management which is essentially a strategy of
overseeing the General contractors/ Sub -contractors supervision team at site,
monitoring their established processes and doing periodic quality checks at random.

As Client Representative, Masters will represent your best interest in

interactions with contractors, major sub contractors and all other consultants.

During final design, construction management tasks include constructability

and cost-saving reviews, consequent design changes and environmental compliance.
The construction phase involves implementation of the construction plan by the
Project Construction Manager including day-to-day communications and
coordination with contractors.

Phases of Construction & Installation Management

o Appointment of contractors

o Planning management/Forecasting Management

o Cost management

o Site management

o Quality control

o Environment, Health & Safety management

o Co-ordination with client, architect and other consultants

 3. Post Construction Management
Through our post construction management services we ensure that the project
is handed over to the client in a controlled and disciplined manner. Masters will also
co-ordinate for the handover of all documents including as built drawings and
approved O&M manuals by the Contractors/ Vendor.

Phases of Post Construction Management

o Package closure technical & commercial

o Final cost report

o Co-ordination for hand over - documents including as built drawings,

operation & maintenance manuals

6.10 Pre- Feasibility studies are considering following points:

Planning issues.

Assessing the likelihood that an environmental impact assessment will be required.

Other legal / statutory approvals.

Analysis of the budget relative to client requirements.

Assessment of the potential to re-use existing facilities or doing nothing rather than
building new facilities.

Assessment of any site information provided by the client.

Site appraisals, including geotechnical studies, assessment of any contamination,

availability of services, uses of adjoining land, easements and restrictive covenants and so
on.
 Considering different solutions to accessing potential sites.

Analysis of accommodation that might be included or excluded.

Assessment of the possible juxtaposition of accommodation and preparing basic stacking

diagrams.

Appraisal of servicing strategies.

Program considerations.

Procurement options.

1) Factors affecting to the feasibility studies.

2) Criteria for project selection.
3) Role of PMC
4) Technical appraisal

Dictation of Notes

Solving various examples
 What are various project appraisals?
What is IRR,Pay back period,NPV?
What are Pre tender and post tender ?

JSPM Group of Institute

Course: Civil Engineering

Project Management- Assignment

Unit VI
Que.1 Define project. What are the requirements of project for successful completion?

Que. 2 Find IRR for the project with following details:

i. Duration of project- 5years

ii. Initial investment- Rs. 10000/-
iii. Periodic return- Rs. 5000/- per year

Que. 3 Write a detailed note on Break Even Point Analysis

Que. 4 Write a short note on:

a. Cash flow diagram

b. Payback period
c. Benefit cost ratio
d. ARR method
e. IRR method

Que. 5 What do you understand by NPV method? State the project is feasible or not by NPV
method if project cost is Rs. 200000 has cash flow of Rs. 30000 for a period of 5 years. Firm
expects returns at 10% per annum.

Que. 6 Differentiate between NPV and IRR.

Que. 7 State types of project appraisal. Explain any two.

Que. 8 Write a note on: 1. Detailed project report

2. Role of project management consultants

Que. 9 A company wishes to invest in a project. It has two alternatives A and B. Following data
pertains to the two alternatives.

Particulars Project A Project B

Initial investment 100000 150000

 Cash inflows

Year 1 70000 90000

Year 2 50000 85000

Interest rate 10% 10%

Which project will the company select based on NPV and IRR

Que.10. Following data pertains to two projects A and B. Suggest which one is to be selected
based on-

i. NPV @ 10% interest

ii. IRR

Particulars Project A Projectb

Initial investment 4,00,000 3,50,000

Cash inflows

Year 1 1,50,000 1,00,000

Year 2 2,00,000 3,00,000

Year 3 80,000 50,000

Year 4 1,00,000 90,000

Year5 20,000 60,000

Session outcomes

1. Able to know the basis on which project is evaluating.

2. Able to understand the different appraisal criteria for a project.
3. Able to understand the methods of evaluations to project financially.
4. Able to know the break even analysis for a project.
5. Able to describe the feasibility of a project and its implementation.
6. Able to prepare detailed project report.
7. Able to describe the role of project management consultant in a project.