PROJECT

IDENTIFICATION
AND
FORMULATION

vddf 1
 1-2

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.

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.
These ideas are then transformed into a project.
 1-3

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

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
 1-4

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
Complementary Innovation Offers something new
and introduces few changes in the structure of the
business
Breakthrough Innovation (Radical Innovation)
Changes the fundamentals of the business, creating a new
industry and new avenues for extensive wealth creation
 1-5

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.
The input characteristics define what the project will consume in
terms 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.
 1-6

Importance of Project Identification

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
 1-7

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,
 1-8

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.
 1-9

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.
 1-10

Contd.

4.National Resource Survey

Natural resource surveys are
important sources of for identifying
agricultural and mineral related
development projects.
 1-11

Contd.
5.Socio-spatial Approach To Project
Identification
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.
 1-12

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
 1-13

Contd.

Top-Down Approach: Projects are identified

based on demands from beyond the
community.

Bottom-Up Approach: In this approach

community/beneficiaries are encouraged to
identify and plan the projects themselves with
or without outsiders.
 1-14

Advantages of Top-Down Approach

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)
 1-15

Limitations of Top-Down Approach

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.
 1-16

Advantages of Bottom-Up Approach

Interveners accomplish more with limited resources
since people tend to safeguard what they have
provided for themselves.
Develops peoples capacity to identify problems
and needs and to seek possible solutions to them.
Provides opportunities of educating people.
Helps people to work as a team and develop a
WE attitude - makes project progressive and
sustainable.
Resources are effectively managed; dependence
reduces, there is increased equity, initiative,
accountability, financial and economic discipline.
 1-17

Limitations of Bottom-Up Approach

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
 1-18

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;
 1-19

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,
 1-20

Project Selection / Idea Generation

Project selection process starts with the
generation of a product idea.
In order to select the most promising
project, the entrepreneur needs to generate
a few ideas about the possible projects
he/she can undertake.
The project ideas can be discovered from
various-internal and external sources.
 1-21

Project Selection / Idea Generation

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
 1-22

Contd.
Project ideas arise from identification of a number of
different factors.
A) At the micro-level project ideas emanate from:-
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;
 1-23

Contd.
B) At the macro-level project ideas emerge from:-
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.
 1-24

Select development projects

 1-25

Criteria for selecting a project

Investment size
Location of project
Technology to be used
Equipment
Marketing
Labour
Working Capital Requirements
Economic Viability
 1-26

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

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.
 1-27

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.

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 kick-
back and in the process sacrifice quality. This is
shortsightedness and no compromise on quality should
be made.
 1-28

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.

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.
 1-29

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).

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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 1-31

Market & Demand Analysis

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.
 1-32

Steps in Market & Demand Analysis

 Key Step in Market & Demand Analysis and 1-33

their Inter-relationship

Collection of Demand
Secondary Forecasting
Information

Characterization
Situational
of the Market
Analysis and
Specifications
of Objectives

Market
Conduct of Planning
Market
Survey
 1-34

A. Specification of Objectives

Get a feel for the relationship between the

product and its market, the project analyst may
informally talk to customers, competitors,
middlemen and other in the industry.

Look at the experience of the company to learn

about the purchasing power of customer, action
& strategies of competitors.
 1-35

A. Specification of Objectives

Objectives give answer to following questions:

1. Who are the consumer?
2. How many consumers are there?
3. What do they want?
4. Why do they want it?
5. When do they want it?
6. How do they want it?
7. Where do they want it?
8. What quality is desirable?
9. How much can they spend?
10. What price is acceptable?
 1-36

B. Collection Of Market Information

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.
 1-37

Secondary Sources of Data

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 Accounts of the Companies
Listed on the Stock Exchange
Annual Reports of the Various Associations of
Manufacturers
 1-38

C. Conduct of Market Survey

Market survey is used when secondary data is not available or
not fully available.
 1-39

Contd
Some Problems:
Heterogeneity of the Country
Multiplicity of the Languages

Design of Questionnaire
 1-40

D. Characteristics Of Market
This step characterizes the market on the basis of information gathered.
1. Demand for the products/services
2. Market Segments
Consumer Groups
Geographic Variables
Demographic Variables
Psychographic Variables
Behavioural Variables
3. Price
4. Methods of distribution and sales promotion
5. Consumers
6. Suppliers & Competitors
7. Government Policy
 1-41

Forecasting
Predicting the future

Qualitative forecast methods

subjective

Quantitative forecast methods

based on mathematical formulas
 1-42

Types of Forecasting Methods

Depend on
time frame
demand behavior

causes of behavior
 1-43

Time Frame

Indicates how far into the future is

forecast
Short- to mid-range forecast
typically encompasses the immediate future
daily up to two years
Long-range forecast
usually encompasses a period of time longer
than two years
 1-44

Demand Behavior
Trend
a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand
occurring periodically
 1-45

Causes of Behavior
Analytical
Cause effect relationship basis
Quantitative
Explicit
 1-46

E. Demand Forecasting
Qualitative Methods
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
 1-47

Jury of Executive Opinion Method

Rationale
Upper-level management has best information on latest
product developments and future product launches
Approach
Small group of upper-level managers collectively
develop forecasts Opinion of Group
Main advantages
Combine knowledge and expertise from various
functional areas
People who have best information on future
developments generate the forecasts
 1-48

Jury of Executive Opinion Method

Main drawbacks
Expensive
No individual responsibility for forecast
quality
Risk that few people dominate the group
Subjective
Reliability is questionable
Typical applications
Short-term and medium-term demand
forecasting
 1-49

Delphi Method
Rationale

Eliciting the opinions of a group of

experts with the help of mail survey

Anonymous written responses

encourage honesty and avoid that a
group of experts are dominated by
only a few members
 1-50

Delphi Method

Approach

Coordinator Each expert Coordinator

Sends Initial writes performs
Questionnaire response analysis
(anonymous)

Coordinator No Yes
Coordinator
Consensus
sends updated summarizes
reached?
questionnaire forecast
 1-51

Delphi Method
Main advantages
Generate consensus

Can forecast long-term trend without availability of

historical data
Main drawbacks
Slow process

Experts are not accountable 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
 1-52

Time Series Projection Methods

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

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:
Trend Projection Method
Exponential Smoothing Method
Moving Average Method
 1-53

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
 1-54

Exponential Smoothing
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 + et
Where Ft + 1 = forecast for year )
= smoothing parameter
et = error in the forecast for year t = St = Ft
 1-55

Solution of problem for Exponential Smoothing

 1-56

Moving Average
Naive forecast
demand in current period is used as next periods forecast
Simple moving average
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
 1-57

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
 1-58

Weighted Moving Average Example

MONTH WEIGHT DATA

August 17% 130
September 33% 110
October 50% 90

3
November Forecast WMA3 = Wi Di
i=1

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

= 103.4 orders
 1-59

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
 1-60

Chain Ratio Methods

Market Potential for heated coats in the any Market:

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
 1-61

Chain Ratio Methods

Market Potential for heated coats in
the market.:
Market Sales Potential =
U xAx M x I x C x S x F x E xY
= 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
 1-62

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.
 1-63

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
 1-64

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
 1-65

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

 1-66

End Use Method

This method forecasts the demand based on the
consumption coefficient of the various uses of the
product.

Projected Demand for Indchem

Consumption Projected Output Projected Demand for
Coefficient in Year X Indchem in Year X
Alpha 2.0 10,000 20,000
Beta 1.2 15,000 18,000
Kappa 0.8 20,000 16,000
Gamma 0.5 30,000 15,000
Total 69,000
 1-67

Leading Indicator Method

This method uses the changes in the
leading indicators to predict the changes
in the lagging indicators.
Two basic steps:
1. Identify the appropriate leading
indicator(s)
2. Establish the relationship between the
leading indicator(s) and the variable to
forecast.
 1-68

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.
 1-69

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.
 1-70

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
 1-71

Uncertainties in Demand Forecasting

Data about past and present markets.
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
 1-72

Contd
Environmental changes
Technological changes
Shift in government policy

Developments on the international scene

Discovery of new source of raw material

Vagaries of monsoon
 1-73

Coping With Uncertainties

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
 1-74

F. Market Planning
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:
(a) Defining the Business
(b) Analyzing the Current Market
(i) Market Analysis
(ii) SWOT Analysis
 1-75

Contd.
(c) Objectives
(d) Marketing Strategy
Target market Segment
Positioning
Product Line
Price
Distribution
Sales force , Sales promotion , and Advertising
(e) Budgeting
(f) Implementation and Control
1-76
 1-77

Objective of Technical Analysis

Primary Objective
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.
To find out the cost of project, so that profitability
can be calculated.
 1-78

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

The analysis encompasses available alternative technologies,

selection of the most appropriate technology in terms of
optimum combination of project components, implications of
the acquisition of technology, and contractual aspects of
licensing.

Special attention is given to technical dimensions such as in

project selection. The technology chosen should also keep in
view the requirements of raw materials and other inputs in
terms of quality and should ensure that the cost of production
would be competitive.
 1-79

Activities in Technical Analysis

1. Technology selection
2. Material and utilities input requirements
3. Flexibility in product-mix
4. Plant capacity
5. Location and size of the project
6. Machinery and equipment
7. Charts and Layouts
8. Work Schedule
9. Cost of Project
 1-80

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.
 1-81

2. Materials and Utilities Input Requirements

Raw-materials
Processed Industrial materials and components

Auxiliary materials and factory supplies

Utilities
 1-82

3. Product Mix Flexibility

Another area to be analysed under the

technical analysis is flexibility of technology
and plan regarding product mix.
 1-83

4. Plant Capacity

Technological requirements
Input constraints
Market conditions
Investment cost & resources of firms
 1-84

5. Location and Site selection

Nearness to raw-materials and market

Availability of infrastructure
Labour situations
Government policies
Other factors
 1-85

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.
 1-86

7. Charts and Layouts

Material Flow Diagram

Production Line Diagram
Transport Layout
Utility Consumption Layout
Communication Layout
Organisation Layout
Plant Layout
 1-87

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 account the availability of
finances

To develop a plan operations covering the

initial period (the running - in period).
 1-88

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
1-89
 1-90

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.
 1-91

Financial Evaluation of Project

Financial Evaluation is a Planning Process used to
determine whether a firms 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)

 1-92

Financial Cost
Cost of Operators
(from Technical (from Financial
Analysis) Analysis)

Revenue Cash
Inflows (from Market
Cost Cash Outflows
and Demand
Analysis)

Various Appraisal
Net Cash Inflows Techniques
ARR
PBP
NPV
Accept/Reject
IRR
Decision
PI etc.
PROJECT FORMULATION

What is Project Formulation?

Stages of Project Formulation

Project Report
 1-94

What is Project Formulation?

Taking a first look carefully and critically at the
project idea

Carefully weighing its various components

Analysing with the assistance of specialists or

consultants

Assessment of the various aspects of an investment

proposition

It is an important stage in the pre-investment phase

 1-95

Project Formulation
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,
 1-96

Stages of Project Formulation

1. 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
 1-97

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
 1-98

2. Techno-Economic Analysis
Screens the idea to-

Estimate 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
 1-99

3. Project Design and Network Analysis

It is the heart of the project entity

It defines the sequence of events of the project

Time is allocated for each activity

It is presented in a form of a network drawing

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

It defines the inputs required for each activity

Inputs include materials, human resources

It evaluates the feasibility of the project from the

point of view of the availability of necessary
resources

This aids in assessing the project cost

 1-101

5. Financial Analysis
It involves estimating the project costs, operating cost and
fund requirements

It helps in comparing various project proposals on a common

scale

Analytical tools used are discounted cash flow, cost-volume-

profit relationship and ratio analysis
Investment decisions involve commitment of resources in
future, with a long time horizon

It needs caution and foresight in developing financial forecasts

 1-102

6. Cost- Benefit Analysis

The overall worth of a project is

considered

The project design forms the basis of

evaluation

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

Helps the project-sponsoring body, the

project-implementing body and the
external consulting agencies to
accept/reject the proposal
 1-104

Constraints in Project Formulation

Lack of a viable / feasible project idea

Lack of realistic / achievable objectives

Lack of necessary resources / infrastructure to

convert idea into reality

Policies of government / Legal restrictions

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

An entrepreneur/expert prepares the report before

the investment in project is done

The report assesses the demand for proposed

product/service, works out cost of investment and
profitability on this investment

It acts as an instrument to convince investors to

invest in the project
 1-106

Significance of Project Report

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

Technical aspects technology, machinery, equipment

needed

Financial aspects Total investment needed, entrepreneurs

contribution, cost of capital and return on capital

Production aspects Product details, justification for the

choice of product, export worthiness

Managerial aspects Qualifications, experience of people

needed for managerial posts
 1-109

Contents of a project report

Objectives and scope of the report
Product characteristics (product design, specifications, quality
standards, uses and applications)
Market position and trends (current capacity for production,
potential demand, export prospects, trends in import-export,
price structure etc)
Raw materials (types, quality, sources, price)
Manufacturing (process, production schedule, technique used)
 1-110

Contd.
Plant and machinery (types, infrastructure support, cost)

Land and building (Requirement, building construction schedule,

choice of location, cost)

Financial implications (Capital structure, fixed and working

capital investment, project cost, profitability)

Marketing channels (Trade practices, marketing and advertising

strategy)

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

Organizations like Small Industries Service

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

The financial institutions ascertain from the report,

whether the project can generate enough funds to
repay the borrowings in stipulated time frame
 1-112

THANK YOU