6a.Common_PM_PROJECT EVALUATION

• Project


  In the economic sense, directly or indirectly adds to the economy of the Nation
• Most major and critical projects in public sector, especially in sectors like irrigation, agriculture, and infrastructure, are plagued by tremendous time and cost overruns
• Even in the private sector, the performance is not satisfactory, as evident from the growing sickness in industry and rapid increase in non-performing assets (NPAs) of Banks and Financial Institutions
• Reasons for time and cost overruns

  • Technical
  • Financial
  • Procedural
  • Managerial
• Most of these problems mainly stem from inadequate project formulation and haphazard implementation
• Project identification


  An important step in project formulation, where project ideas are conceived with the objective of meeting market demand, exploiting natural resources or creating wealth
• Project ideas for developmental projects come mainly from the national planning process, while industrial projects usually stem from identification of commercial prospects and profit potential
• As projects are a means to achieving certain objectives, there may be several alternative projects that will meet these objectives
• It is important to indicate all the other alternatives considered with justification in favour of the specific project proposed for consideration
• Opportunity studies


  Identify investment opportunities and are normally undertaken at macro level by agencies involved in economic planning and development
• Types of opportunity studies

  • Area study
  • Sectoral and sub-sectoral studies
  • Resource based studies
• Pre-feasibility study


  An intermediate stage between a project opportunity study and a detailed feasibility study, focusing on assessing market potential, magnitude of investment, technical feasibility, financial analysis, risk analysis, etc.
• Support studies


  Carried out before commissioning pre-feasibility or feasibility study, covering one or more critical aspects of the project in detail
• Feasibility study


  Forms the backbone of project formulation, investigating practicalities, ways of achieving objectives, strategy options, methodology, and predicting likely outcome, risk and consequences of each course of action
• Aspects covered in a feasibility study

  • Economic and market analysis
  • Technical analysis
  • Market analysis
  • Financial analysis
  • Economic benefits
  • Project risk and uncertainty
  • Management aspects
• Economic and market analysis


  Focuses on demand forecast, projection of demand-supply gap, and considering multiple parameters that influence the market
• Technical analysis


  Covers available alternative technologies, selection of the most appropriate technology, implications of technology acquisition, and contractual aspects of licensing
• Aspects covered in technical analysis

  • Technology availability, alternatives, latest/state-of-art, other implications
  • Plant capacity, market demand, technological parameters
  • Inputs (raw materials, components, power, water, fuel, others)
  • Availability of skilled manpower
  • Location, logistics
  • Environmental considerations (pollution, etc.)
  • Requirement of buildings/foundation
• Environmental impact studies


  Undertaken to identify and describe the environmental resources/values or attributes affected by the project, assess the environmental effects, and describe alternatives with different environmental effects
• Environmental impact studies would facilitate providing necessary remedial measures in terms of the equipment and facilities to be provided in the project to comply with environmental regulation specifications
• Commonly used techniques for financial analysis

  • Payback period
  • Return on Investment (ROI)
  • Net Present Value (NPV)
  • Profitability Index (PI)/Benefit Cost Ratio
  • Internal Rate of Return (IRR)
• Payback period


  The time required to recover the initial project investment out of the subsequent cash flow
• Payback period calculation


  • Example 1 (uniform annual return): Investment of Rs. 20,000, annual net return of Rs. 5,000 - payback period of 4 years
  • Example 2 (varying annual return): Investment of Rs. 1,00,000, payback period of 2.5 years
• The drawback of the payback period method is that it ignores any return received after the payback period and assumes equal value for the income and expenditure irrespective of the time
• The drawback in this method is that it ignores any return received after the payback period and assumes equal value for the income and expenditure irrespective of the time.
• It is also possible that projects with high return on investments beyond the pay-back period may not get the deserved importance i.e., two projects having same pay-back period – one giving no return and the other providing large return after pay-back period will be treated equally, which is logically not correct.
• Return on Investment (ROI)


  The annual return as percentage of the initial investment, computed by dividing the annual return with investment
• Computation of ROI also suffers from similar limitation as of pay-back period. It does not differentiate between two projects one yielding immediate return (lift irrigation project) and another project where return is received after some gestation period say about 2-3 years (developing new variety of crop).
• Both the pay-back period and ROI are simple ones and more suited for quick analysis of the projects and sometimes provide inadequate measures of project viability. It is desirable to use these methods in conjunction with other discounted cash flow methods such as Net Present Value (NPV), Internal Rate of Return (IRR) and Benefit-Cost ratio.
• Discounted Cash Flow Analysis

  The principle of discounting is the reverse of compounding and takes the value of money over time.
• Discounted Cash Flow Analysis

  Compute present value (PV) of a cash flow "Cn" in "nth" year at a discount rate of "d" using the formula: PV= Cn / (1+d)n
• Net Present Value (NPV)

  The difference between the present value of benefits and the present value of costs
• Benefit-Cost Ratio (B-C Ratio) or Profitability Index (PI)


  The ratio of total present value of the returns to the total present value of the investments (B/C)
• Internal Rate of Return (IRR)

  The discount rate at which the NPV of the project is zero
• Factors attributing to risk and uncertainties of a project

  • Technical
  • Economical
  • Socio-political
  • Environmental
• Apart from the financial benefits (in terms of Return on Investment) the economic benefits of the project are also analyzed in the feasibility study. The economic benefits include employment generation, economic development of the area where the project is located, foreign exchange savings in case of import substitutes or earning of foreign exchange in case of export oriented projects and others.
• Aspects covered in project appraisal

  • Market Appraisal
  • Technical Appraisal
  • Environmental Appraisal
  • Financial Appraisal
  • Economic Appraisal
  • Managerial Appraisal
  • Social Cost Benefit Analysis (SCBA)
• Once the projects are appraised and the investment decisions are made a Detailed Project Report (DPR) is prepared. It provides all the relevant details including design drawings, specifications, detailed cost estimates etc. and this would act as a blue print for project implementation.