Project & Operations Management

Block-I
Project
&
Operations Management
Project Management - An Overview
Project & Operations Management
Block
I
PROJECT MANAGEMENT – AN
OVERVIEW
UNIT 1
Introduction to Project Management 1-32
UNIT 2
Project Idea Generation and Screening 33-63
UNIT 3
Market and Technical Analysis of Projects 64-95
UNIT 4
Financial Analysis of Projects 96-143
UNIT 5
Project Selection 144-176
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COURSE INTRODUCTION
Project management plays an important role in an organization’s corporate
strategy. Projects enable organizations to convert their strategies into actions,
and their objectives into reality. Although many of the project management tools
are derived from other management disciplines, project management is a
specialized field, with unique management techniques such as critical path
analysis and work breakdown structures. In the present scenario, the application
of project management is no longer limited to the projects in construction and
engineering sectors; these techniques are also applied to projects in fields as
diverse as education, healthcare, and software development.
Timely and proper implementation of project and operations management

techniques enables effective management of resources which are used by the
organizations to produce goods and services. Growing inter-firm rivalry and
competition has increased the importance of operations management in
organizations. Of late, operations management has gained a lot of importance,
and has become a key discipline in management science. Organizations use
various operations management techniques to make decisions on various aspects
like facility location and capacity determination, identification of appropriate
manpower, determination of optimum inventory levels, and production
scheduling and job assignment.
Project & Operations Management examines key issues involved in the fields of
project management and operations management. The course is divided into two
major parts.
The first part of the course introduces students to the project management
functions that are carried out at the different stages of a project’s life cycle. The
course discusses the complexities involved in handling projects and managing
the various phases of the project life cycle.
The second part of the course presents a step-by-step analysis of the activities of
operations managers and provides an understanding of the planning, organizing,
controlling, directing, motivating and coordinating activities of an operations
system in manufacturing and service organizations.
BLOCK I: PROJECT MANAGEMENT –
AN OVERVIEW
The first block of the course on Project & Operations Management provides an
introduction to project management. The block contains five units. The first unit
provides an idea about project management. The second unit focuses on the first
stage of the project life cycle, that is, idea generation and screening of projects.
The third unit discusses the market, technical and environmental analysis of
projects, while the fourth unit examines the financial analysis of projects. The
fifth unit discusses project selection.
The first unit, Introduction to Project Management, discusses the definitions of a

project, program and project management. The unit focuses on the
characteristics, parameters and classification of projects. It examines the
relationship between the various project parameters, between project
management and other management disciplines, and between project
management and line management. The unit also deals with the project
management environment. It discusses project stakeholders, organizational
influences and project life cycle.
The second unit, Project Idea Generation and Screening, deals with the
generation of project ideas and discusses the various creative techniques
involved in the generation of ideas. The unit explains the various aspects in
scanning of the business environment. It then discusses the activities that can be
carried out to generate new project ideas. The unit explains the process of initial
screening of project ideas, and about the project rating index, an evaluation
method used to streamlining the initial screening process. Finally, the unit
discusses the factors that can be used by the firms to enhance the net present
value of a project.
The third unit, Market and Technical Analysis of Projects, deals with market
analysis, demand analysis, and technical analysis of projects. Under market and
demand analysis, the unit provides an idea about situational analysis and
objectives specification, collection of data, market survey, market description,
demand forecasting, uncertainties in demand forecasting and market planning.
Under technical analysis, the unit explains technology selection, input
requirements and utilities, product mix, plant capacity and functional layout,
location of the project, machinery and equipment and consideration of
alternatives.
The fourth unit, Financial Analysis of Projects, discusses the means of financing
the project. It provides an idea about the working capital requirements and
financing. It discusses the concepts of time value of money, cost of capital,
project appraisal criteria and risk analysis in capital investment decisions.
Finally, it discusses social cost benefit analysis.
The fifth unit, Project Selection, provides the criteria for project selection
models. The unit explains the various project selection models. It discusses the
ways and techniques used to analyze the uncertainties in a project. Finally, the
unit explains project proposal.
Unit 1
Introduction to Project Management
Structure
1.1 Introduction
1.2 Objectives
1.3 Definition of Project
1.4 Project Characteristics
1.5 Project Parameters
1.6 Relationship between Project Parameters
1.7 Classification of Projects
1.8 Definition of a Program
1.9 Project Management
1.10 Project Management – Relationship with Other Management Disciplines
1.11 Relationship between Project Management and Line Management
1.12 Project Stakeholders
1.13 Organizational Influences
1.14 Socio-economic Influences
1.15 Environmental and Legal Influences
1.16 Project Phases and the Project Life Cycle
1.17 Summary
1.18 Glossary
1.19 Self-Assessment Exercises
1.20 Suggested Reading/Reference Material
1.21 Answers to Check Your Progress Questions
1.1 Introduction
In this unit, we introduce you to the concepts in project management. Men have
been planning and managing projects since the beginning of civilization. Of late,
people recognized that techniques like cost control, scheduling of activities,
resource procurement, and risk management that are relevant for the success of a
variety of projects, whether building dams, laying roads, or organizing events.
This led to the evolution of a set of unique management tools, techniques, and
methodologies, which constitute the present day ‘project management’. Project
management gained recognition as a specialized area of management about 50
years ago. Today, project management has spread from its traditional focus on
the fields of construction and engineering into sectors as diverse as education,
healthcare and software development.
Project Management – An Overview
This unit will introduce you to project management by discussing the definitions
of project, program, and project management. We will discuss the
characteristics, parameters and classification of projects. We shall then move on
to discuss the relationship between the various project parameters, between
project management and other management disciplines and between project
management and line management. Finally, we would be discussing the project
management environment including project stakeholders, organizational
influences and project life cycle.
1.2 Objectives
By the end of this unit, students should be able to:
 define a project.
 discuss the characteristics of a project.
 identify the various project parameters, and demonstrate the relationship
between them.
 classify projects.
 define a program.
 explain project management, and recognize the relationship of project
management with other management disciplines.
 demonstrate the relationship between project management and line
management.
 define project stakeholders.
 identify organizational, socio-economic, environmental and legal influences.
 state the project phases, and explain the project life cycle.
1.3 Definition of Project

A project is a group of unique, inter-related activities that are planned and
executed in a certain sequence to create a unique product and/or service, within a
specific time frame, budget, and the client’s specifications.
According to the Project Management Institute’s (PMI) publication, ‘A Guide to
the Project Management Body of Knowledge’ (PMBOK), a project is defined as,
“a temporary endeavor undertaken to create a unique product or service.”
The British Standard 6079 of 1996 (BS6079) defines a project as, “a unique set
of coordinated activities, with definite starting and finishing points, undertaken
by an individual or organization to meet specific objectives within defined
schedule, cost, and performance parameters.”
Projects and operations are generally considered similar as both are carried out
by people, and are planned, implemented, and controlled to produce results
within the given resource constraints. However, projects are different from
operations as they play a crucial role in an organization’s corporate strategy or
relate directly to the policies and initiatives of the government.
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Check Your Progress

1. In which of the following sectors is project management applicable?
i. Construction and engineering
ii. Education
iii. Healthcare
iv. Software development
a. Only i, ii, and iii
b. Only i, iii, and iv
c. Only ii, iii, and iv
d. i, ii, iii, and iv
2. Which of the following options has defined project as “a temporary
endeavor undertaken to create a unique product or service”?
a. British Standard 6079 of 1996
b. Project Management Institute
c. Tandon Committee
d. American National Standards Institute (ANSI)
3. _______________ can be defined as a group of unique, inter-related
activities that are planned and executed in a certain sequence to create a
unique product or service, within a specific time frame, budget and client’s
specifications.
a. Operations
b. Process
c. Project
d. Program
4. Which of the following statements is true regarding projects and
operations?
i. Projects and operations are generally considered similar.
ii. Projects and operations are both carried out by people.
iii. Projects and operations are planned, implemented, and controlled to
produce results within the given resource constraints.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
3
1.4 Project Characteristics

Organizational structures and processes are custom-made to produce a specific
product and/or service. Sometimes, organizations have to take up new tasks that
they are not equipped to handle. These tasks are new to the organization as they
are not performed earlier or they may not be repeated in the future again. To
perform such unique tasks, organizations adopt the project approach. The project
approach is adopted when the existing systems in the parent organization are not
equipped to handle new task. Some of the characteristics of the tasks that qualify
to be projects are – unique activities, attainment of a specific goal, sequence of
activities, specified time and interrelated activities.
1.4.1 Unique Activities

Every project has a set of activities that are unique, which means it is the first time
that an organization handles that type of activity. These activities do not repeat in
the project under similar circumstances, i.e., there will be something different in
every activity or even if the activity is repeated, the variables influencing it change
every time.
1.4.2 Attainment of a Specific Goal

Organizations take up projects to perform a particular task or attain a specific
goal. These tasks differ from project to project. The projects in an organization
could be constructing a new facility, computerizing the accounts department or
studying the demand for a new product that the organization plans to launch in
the market. All these projects have a specific goal or result to attain and hence
we can say that every project is goal-oriented.
1.4.3 Sequence of Activities

A project consists of various activities that are to be performed in a particular
sequence to deliver the end-product. This sequence depends on the technical
requirements and interdependency of each of the activities.
1.4.4 Specified Time

Every project has a specified start date and completion date. This time limit is
either self-imposed or it is specified by the client. The life span of a project can
run from a few hours to a few years. A project comes to a close when it delivers
the product and/or service as per the client’s requirements or when it is
confirmed that it is no longer possible for the project to deliver the final product
and/or service as required by the client.
1.4.5 Interrelated Activities

Projects consist of various technically interrelated activities. These activities are
considered interrelated as the deliverable (output) of one activity becomes the
input for another activity of the project. Consider the project of building a
multistoried luxury hotel. This project consists of various activities such as
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making a building plan, landscaping, constructing the building, designing the

interiors, furnishing the rooms, etc. All these activities are interrelated and are
equally important for the completion of the project.
1.5 Project Parameters
The primary aim of a project is to deliver a product and/or service to a client

within the specified time, budget (resources and cost), and according to the
quality and performance specifications. Usually, the clients ask for too much to
be delivered within limited resources. Therefore, it is important for the project
manager to make the clients aware of the limitations pertaining to time, budget,
technicalities, etc., that he/she is working under. The success of a project depends
on the project manager’s ability to strike a balance between these interrelated
variables or constraints. Some common constraints that influence a project are –
scope, quality, time, cost and resources.
1.5.1 Scope
Scope is a brief and accurate description of the end-products or deliverables to
be expected from the project that meet the requirements. Scope describes all the
activities that are to be performed, resources that will be consumed, and the end-
products from the successful completion of the project, including the quality
standards. The scope also includes the target outcomes, prospective customers,
outputs, work, financial and human resources required to complete the project.
1.5.2 Quality
Every project has to satisfy the quality requirements at two levels – product
quality and process quality. The first quality requirement relates to products
resulting from the project and the second relates to the management processes
that have to be in place to implement the project. A comprehensive quality
management system ensures effective utilization of scarce resources to achieve
the project objective of delivering products and/or services to the client’s
satisfaction.
1.5.3 Time
Time is one of the important resources available to a project manager. At the
same time, it is one of the major constraints within which a project has to be
completed. Generally, the client or the sponsor of the project specifies the time
limit for the completion of the project. The time required to complete a project is
inversely related to the cost of the project. Therefore, the cost of a project
increases as the time available for its completion decreases. Since time cannot be
stored as an inventory, it is the duty of the project manager to manage time by
carefully scheduling the various activities on time.
1.5.4 Cost
Cost plays a major role in the various stages of a project life cycle. Project costs
include the monetary resources required to complete the activities mentioned in
the scope of the project. Project costs are costs associated with all the activities
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in the planning and implementation phases. The client or the sponsor of the
project prepares a budget based on the estimated costs of various project
activities, within which the project manager has to deliver the product.
1.5.5 Resources
Resources include the people, finances, and the physical and information
resources required to perform the project activities.
Check Your Progress

5. Organizations adopt the project approach when _____________________.
i. the tasks are new to the organization
ii. the tasks may not be repeated in the future
iii. the existing systems in the parent organization are not equipped to
handle the new task.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
6. Which of the following is not a characteristic of a project?
a. Every project has a set of unique activities.
b. A project is taken up to perform a particular task or attain a specific
goal.
c. A project consists of various technical activities that are independent
and unrelated.
d. A project consists of various activities that need to be performed in a
particular sequence to deliver the end-product.
7. ___________ can be defined as a brief and accurate description of the end-
products or deliverables to be expected from the project that meet the
requirements.
a. Quality
b. Scope
c. Program
d. Strategy
8. Identify the project resources.
i. People resources
ii. Financial resources
iii. Physical resources
iv. Information resources
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1.6 Relationship between Project Parameters
The scope and quality of a project are influenced by a variety of constraints like
time, cost, and availability of resources. The success of a project largely depends
on the project manager’s ability to keep the project in equilibrium. In a project
environment, the management prepares a project plan by estimating the
approximate time, cost, and the resources (people, equipment, land and
buildings, etc.) required to accomplish the goals mentioned in the scope and
quality of the project as required by the client/sponsor.
The project manager is given this plan describing the time, cost, and resource
allocations that are in equilibrium. But the success of the project depends on the
project manager’s ability to balance these variables according to the changes
arising from within and outside (clients) the project system. The projects usually
go off balance when clients request for changes in time frame, scope and quality.
The client may want these changes because: there is a change in the market
demand that requires adding some more features to the end product; the product
needs to be launched ahead of its due date for competitive reasons; there is loss
of key personnel or breakdown of machinery that calls for rescheduling; and a
new technology is expected in the market.
1.7 Classification of Projects
Projects can be classified based on their characteristics such as business value,

risk level, time span, complexity of tasks and the monetary value of the project.
Projects can be classified after studying them carefully. Once the project is
classified, it becomes easy for the management to select the project management
style that best suits that class of project.
Activity: Madurai Textiles is one of the leading manufacturers and exporters

of silk sarees in India. The company's revenues come from the export of
sarees in traditional designs to various countries in Europe, America and the
Middle-East. Of late, the demand for its products in the export market has
come down significantly owing to the changing tastes of the customers
abroad. The company sensed the need for modern designs and embarked on a
project to introduce the latest designs. It recruited three young graduates from
the NIFT (National Institute of Fashion Technology) to work on the new
designs. Why do you think organizations undertake projects? What are the
different types of projects that an organization can take up?
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Answer:
1.8 Definition of a Program
According to PMI’s PMBOK, “A program is a group of projects managed in a

coordinated way to obtain benefits not available from managing them
individually.” Since a program is a collection of different projects, it has wider
scope than an individual project. In business situations, it is very difficult for one
project to deliver all the benefits needed to achieve the objectives of an
organization. Hence, organizations take up business programs that are a
combination of various projects aimed at achieving corporate objectives.
1.9 Project Management
Project management is a system of procedures, practices, technologies, and

know-how that enables the planning, organizing, staffing, directing, and
controlling necessary to successfully manage a project. According to PMI,
“Project Management is the application of knowledge, skills, tools and
techniques to project activities in order to meet or exceed stakeholder needs and
expectations.”
Project management is a carefully planned and organized effort to accomplish a
specific (and usually) one-time effort, for example, constructing a residential
complex or implementing a new computerized banking system. Project
management includes developing a project plan that includes defining project
goals, specifying how the goals will be accomplished, what resources are
needed, and relating budgets and time for completion. It also includes
implementing the project plan, along with careful controls to ensure that the
project is being managed according to the plan. Project management usually
follows five major phases – feasibility study, project planning, implementation,
evaluation, and closing.
Check Your Progress

9. Projects usually go off-balance due to several reasons. Which of the
following options may not be a valid reason in such cases?
a. Change in the market demand that requires addition of new features
b. Breakdown of machinery
c. Recruitment of new employees in the organization
d. Loss of key personnel
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10. Which of the following is not one of the five major phases in a project?
a. Controlling
b. Purchase management
c. Implementing
d. Closing
11. ______________ is a group of projects managed in a coordinated way to
obtain benefits not available from managing them individually.
a. Process
b. Program
c. Operation
d. None of the above
1.10 Project Management – Relationship with Other Management

Disciplines
Although project management has derived most of its knowledge from other
management disciplines, it has evolved as a specialized science over a period of
time. It has its own management techniques such as critical path analysis and
work breakdown structures (discussed later) that are unique to project
management. Like general management, project management also involves all
aspects of planning, organizing, implementing, and controlling. In many
strategic projects, the function of project management will involve disciplines
like:
Finance: Preparing the financial statements while sending the project proposal
and managing the costs of the project.
Personnel: Identifying the skills required to carry out the project, selecting the
project team, and maintaining a good working environment.
Operations: Managing the activities/operations that are repetitive in nature.
Purchase and logistics: Identifying resources (raw materials, equipment, and
services) required for the project, preparing a list of eligible suppliers and
negotiating with them for procuring the right materials and managing the
logistics for a smooth implementation of the project.
R&D: New product development and quality assurance.
Marketing: Marketing the project idea to internal and external sponsors.
1.11 Relationship between Project Management and Line

Management
According to the definition of project management, a project manager has to
control variables such as time, cost and other resources allocated for the project.
But in practice, he/she only has an indirect control over these resources as they
9
are controlled by the line managers or functional managers. Therefore, the

project manager has to maintain good relations with line managers to ensure a
smooth flow of resources. Thus, a project manager should exercise judicious
control over the resources (money, manpower, machinery, facilities, materials,
technology, and information) allocated to the project from various functional
departments. The success of a project depends on the various aspects of project
and line managers’ relations. The characteristics of a good relationship are:
 amicable working relations between the project manager and the departmental
heads who allocate resources to the project.
 functional project member’s ability to report to the functional manager of the
department from where he/she comes from and the project manager for whom
he/she currently works for.
 Employees of various functional departments who are selected to work
on a project usually face difficulties in reporting to multiple bosses. The
issue of who should have control over the functional employees becomes
a source of conflict between the line and the project managers. The
relations can be strained further if any one of them claims sole credit for
the success of the project or rewards for the profits generated by the
project. These conflicts can be resolved when the managers understand
their distinct roles in achieving the overall objectives of the
organization.
Check Your Progress

12. In case of strategic projects, the quality assurance function is taken care of
by the following discipline of project management:
a. Marketing
b. Purchase and Logistics
c. Operations
d. Research and Development
13. Which of the following statement is false regarding project management?
a. Project management involves developing a unique product or process
and managing change.
b. Project management involves managing many risk variables.
c. Project management involves managing the existing systems and
services in an organization.
d. Project management is performed as a one-time initiative that is
conducted in a relatively short time.
14. Which of the following situations will lead to conflicts between the project
managers and the line managers?
i. Issue of control over the functional employees who work for the project
ii. Difficulty in reporting to multiple bosses
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iii. Claiming sole credit for the success of the project

iv. Claiming rewards for the profits generated by the project
1.12 Project Stakeholders
According to the Project Management Institute’s (PMI) Guide to the Project

Management Body of Knowledge, project stakeholders are ‘individuals and
organizations who are actively involved in the project, or whose interest may be
positively or negatively affected as a result of project execution or successful
project completion.’
The project management team should try to identify the stakeholders,
determine their needs and expectations, and then manage and influence those
expectations to ensure a successful project. The manager can use methods like
stakeholder analysis to identify all the potential stakeholders who might have
an impact on the project and then determine their relative ability to influence
the project. Project stakeholders will include those -- who are directly related
to the project like suppliers, clients, employees, and managers; who can
influence the physical, organizational, technological, socio-economic, legal
and political environments; who have an authoritative relation to the project
like government agencies at local, regional, and national levels; and persons,
groups, and associations that have a stake in the project.
1.12.1 Types of Stakeholders
The major stakeholders of any project include project manager, customers,

project team members, sponsor, and parent organization.
Project manager
The project manager is an important stakeholder of the project as he is

responsible for channelizing the project’s resources; developing the project plan;
and ensuring that the project activities are completed on time, within budget, and
according to quality standards. He also acts as an interface between customers
and management. The project manager is responsible for:
 Ensuring the overall success of the project

 Applying the experience gained from past and present projects, in future
projects
 Setting priorities for various project activities
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 Acting as a catalyst for resolving project problems and conflicts

 Evaluating the strengths and weaknesses of the completed projects, and
applying the lessons learned to future projects
 Providing timely information about the project to other stakeholders.
Customers
Customers are those who will use or pay for the deliverable (product or service)
produced by the project. These customers may be internal or external to the
organization. It is the responsibility of the customers to be actively involved in
the project to help ensure its successful completion. For some projects it may be
difficult to identify a specific group of customers. Generally, there are three
categories of customers: internal customers, intermediate customers and external
customers.
Internal customers consist of individuals who are internal to the parent company.
In the above example, the production department is an internal customer.
Intermediate customers are usually external to the company, but they will not be
the final users of the product. Distributors and wholesalers constitute the
intermediate customers of a project. External customers are the individuals or
organizations, who pay for the final product and use it. The project team should
consider all the requirements of different categories of customers.
Project team members

All the groups and individuals who devote time, skills, and effort to the
project are regarded as project team members. Sometimes, the personnel of
the vendor and the client are also appointed members of the project team,
along with the employees of various functional departments who are
assigned to the project. Generally, project team members take care of the
technical, managerial or the administrative aspects of a project. They work
directly with or under a project manager, depending on the way the project is
organized. The team members who look after the technical aspects of a
project perform activities concerned with engineering, construction,
procurement, quality and performance testing. The members in charge of the
administration of the project are involved in activities concerned with
planning, scheduling, budgeting, preparing status reports, managing project
communication etc. Team members play a crucial role in the success of a
project. Therefore, the project manager should use various team-building
skills to encourage the members to work as a team.
Sponsor
A sponsor is an individual or a group within the parent organization who arranges
the resources for the project themselves. This assistance can be in cash or kind.
The sponsor may be a senior executive or a junior manager with formal authority
who is responsible for the project. He acts as a link between the project and the
parent organization.
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Parent Organization
The parent organization is a major stakeholder of the project since its employees
are directly involved in executing the project. Therefore, the project should
contribute towards achieving the corporate goals of the parent organization.
Activity: Sitcon Limited, a popular construction company in India, secured the

first major water retention barrage construction project in Bihar, India. The
barrage was expected to be the longest in India. Addressing the project team,
the company CEO said, “I am very confident of your expertise in handling this
type of project, but the success of this project depends more on how well you
manage the stakeholders, as this place is known for labor unrest, rivalry among
local tribes, and many other political problems.” Do you agree with the CEO's
statement on the role of the stakeholders in the success of this project? If yes,
who are the stakeholders of this project and what should the project team do to
manage the stakeholders effectively?
Answer:
Check Your Progress

15. Which of the following statements are true regarding project stakeholders?
i. Project stakeholders are directly related to the project.
ii. They have a stake in the project.
iii. They have an authoritative relationship with the project.
iv. They influence the socioeconomic and political environments.
16. Which of the following activities is not a major responsibility of the project
manager?
a. Arranging the resources for the project
b. Channelizing the project’s resources
c. Developing the project plan
d. Ensuring that the project activities meet the cost, time and quality standards
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17. Intermediate customers to a project are _____________.

a. customers who are internal to the company and the final users of the
product.
b. customers who are external to the company but are not the final users of the
product.
c. customers who are external to the company and pay for the final product and
use it.
d. customers who provide financial and/or non-financial resources to the
project.
18. Sahara International has a design team that has taken up a project to design a
multi-purpose machine. The production department has expressed a desire
to use the machine. The company also plans to sell the product to outside
customers. The production department will be the ____________ customer
of the project while the outside customers will be the ____________
customers of the project.
a. internal or external, intermediate
b. internal, intermediate or external
c. external or intermediate, external
d. internal or intermediate, external
19. Which of the following statements is/are not true regarding project team
members?
i. Project team members are all the groups and individuals who devote time,
skills, and effort to the project.
ii. Project team members take care of only the technical aspects of a project.
iii. Project team members work directly with or under a project manager,
depending on the way the project is organized.
a. Only i and ii
b. Only i and iii
c. Only ii
d. Only ii and iii
20. The project team members who look after the technical aspects of a project
carry out activities like:
i. Engineering
ii. Budgeting
iii. Quality and performance testing
iv. Managing project communication
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. Only iii and iv
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21. Which of the following aspects is looked after by the project team members
who are in charge of the administrative aspects of a project?
a. Procurement
b. Quality testing
c. Preparing status reports
d. Construction
22. Which of the following stakeholders is responsible for arranging the
resources required for the project?
a. Project manager
b. Customer
c. Sponsor
d. Parent organization
1.13 Organizational Influences

Projects are usually taken up by organizations larger than the projects
themselves. These organizations can be business corporations, government
organizations, professional associations, research and development centers etc.
Organizations that initiate a project will have an influence on the implementation
of the project. These organizational influences even act on projects that have
been initiated by joint ventures or partnerships. Some of the major aspects of
large organizations that influence projects are – organizational systems,
organizational culture and style, and organizational structure.
1.13.1 Organizational Systems

Organizations, which primarily carry out projects, are known as project-based
organizations. They earn revenues mainly by undertaking projects. Some
examples of project-based firms are consultancy firms, architecture firms,
software development firms, infrastructure contractors etc. Some organizations
adopt a management by project approach to manage their ongoing operations.
These organizations treat various aspects of ongoing operations as projects and
apply project management principles to them.
Project-based organizations have well designed management systems (such as
financial systems, control systems, etc.) to help them manage projects effectively.
These organizations have a number of specifically designed systems in place to
monitor the progress of the activities of a project. For example, finance systems are
designed to take care of accounting, tracking and reporting activities of multiple
projects.
Non-project-based organizations, such as manufacturing firms, hotels etc., may not
have any management systems for addressing project needs. Managing projects in
these organizations is a difficult activity. But some non-project-based
organizations will have separate divisions or sub-divisions that work as project-
15
based organizations with project oriented management systems. So, the project
management team should be capable of understanding the influence of various
management systems on the project.
1.13.2 Organizational Culture and Style

Each organization has its own culture, i.e., its shared values, norms and beliefs.
An organization’s policies, procedures and attitude towards authority also reflect
its culture. Organizational culture and management styles have a direct impact
on the functioning of the project team. As a result, organizations that have an
aggressive, risk-taking culture will not employ conservative, cautious project
managers.
1.13.3 Organizational Structure

Sometimes, the organization structure obstructs the free flow of resources from
the parent organization to the project. The organizational structure can be
functional, matrix, or project-based.
A functional organization has a hierarchical structure. In such a structure,
superior-subordinate relationships are clear, i.e., the line of control is clearly
defined. The employees are grouped into departments according to their areas of
specialization, e.g., mechanical, engineering, electrical engineering, production,
marketing, accounting etc. Functional organizations also work on the projects but
their project activities are limited to a single function, e.g. engineering,
manufacturing, marketing etc.
In a project-based organization, the project manager has the authority to assign
priorities and to direct the work of individuals assigned to the project. Most of
the organization’s resources are allotted to various projects. These organizations
also have functional departments, but the groups working in these departments
report directly to the project manager and help in the execution of various
projects.
A matrix organization structure combines some of the characteristics of
functional and project-based organizational structures. In matrix organizations,
project managers and functional managers are jointly responsible for assigning
priorities and for directing the work of individuals assigned to the projects. In
this organizational setup, project managers have equal authority to functional
managers and the staff members report to functional managers as well as project
managers.
Every organization has one of the above discussed organizational structures and
they have an impact on the projects initiated by them. For example, when a
project team is formed by a functional organization, those teams have to form
their own operating procedures and reporting structures that are similar to that of
project-based organizations. This organizational structure also has an impact on
the functioning of a project manager.
16
Example: Impact of Organization Structure on the Project Manager
Selecting the right organizational structure will provide a competitive

advantage for an organization. Some of the effects of organizational structure
on the functioning of a project manager are given below.
Authority: The type of organizational structure existing in a firm may favor

projects or the ongoing operations of the firm. In the function-driven
organization, the project manager has almost no authority, and in the project-
oriented firm, the project manager has complete authority. A project manager
having less authority requires more effort to get decisions approved and
implemented.
Communication: Communication plays a major role in the success of a

project, irrespective of the organizational structure of the parent organization.
Most organizational structures facilitate vertical (top-down and bottom-up)
communication patterns, but sometimes the project manager’s communication
requirements may run counter to the existing communication patterns.
Crossing organizational boundaries always takes more effort. In this situation,
the project manager should do whatever is necessary to keep all the
stakeholders informed and coordinated for achieving the project objectives.
Priority: Multiple projects often compete for the limited resources of an

organization, such as people, equipment, and funding, especially in firms with
a traditional, function-driven management style. Project managers working in
a function-driven structure often have their teams and resources trimmed to
meet the needs of the ongoing operations of the organization or for starting a
new project.
Focus: In project-oriented organizations, projects are in focus as they play a

major role in generating revenues for the organization. Every employee works
towards achieving a single objective, and this focus on a single objective
helps to increase productivity. The employees are focused on their projects as
they work on them throughout the year. This focus and sense of responsibility
towards a single project increases employee morale.
Chain of command: When the chain of command for a project goes against
the organizational structure, it takes more effort to bring a problem to the
notice of the manager concerned. As the project breaks through functional
boundaries, more and more functional managers are required to approve
decisions. And, if certain functional groups have competing interests, clashes
over authority can bring the progress of the project to a standstill.
Project-oriented organizations make it easy to run projects because their

entire structure is set up for that purpose. In most organizations, however,
project managers may have difficulties dealing with the authority structure. In
these cases, they will have to rely more on their own expertise – and on other
project management techniques.
Adapted from Eric Verzuh, “The Fast Forward MBA in Project Management,” John
Wiley & Sons, Inc. p 29-30.
17
Check Your Progress

23. Identify the major factors that influence projects in large organizations.
i. Organizational systems
ii. Organizational culture
iii. Organizational style
iv. Organizational structure
24. From the following options, identify the statements that are true regarding a
functional organization.
i. The line of control is clearly defined.
ii. Functional organizations work on projects and their project activities cover
all functions.
iii. The employees are grouped into departments according to their areas of
specialization.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
25. In the case of project-based organizations,
a. The project manager has the authority to assign priorities and to direct the
work of individuals assigned to the project.
b. Project managers and functional managers are jointly responsible for
assigning priorities and for directing the work of individuals assigned to
projects.
c. All the departments concentrate on a single project and therefore, all the
resources are allotted only to this project.
d. Both (a) and (c)
1.14 Socio-economic Influences

A wide range of socio-economic issues influence projects. The project team
should be aware of these issues as even a minor change in the socio-economic
environment can sometimes affect the success of a project. Some of the socio-
economic factors that influence projects are – standards and regulations,
internationalization and culture.
18
1.14.1 Standards and Regulations

Standards are measures for judging the quality of products. Generally, standards
are documented and approved by a recognized agency/body. These standards
specify the rules and guidelines that organizations must observe when producing
a product or a service. Even when these standards are not mandatory, following
them will enhance the marketability of the products produced by the project
organization.
Regulations are mandatory guidelines that lay down the necessary characteristics
of products or services. Building codes established by Roads and Buildings
(R&B) department are an example of regulations. Usually, these regulations are
drafted by various governmental regulatory agencies and are enforced by
regulatory personnel.
The project team should be cautious enough to ensure that the project meets the
standards and regulations. The early detection of deviations from standards and
regulations can help reduce project costs and duration.
1.14.2 Internationalization
Many organizations have subsidiaries in different countries. The projects
undertaken by such organizations generally cross many national boundaries.
Project managers must therefore be familiar with the political and economic
environment of the countries in which the projects are being executed. They
must also design a communication plan that enables them to manage and
coordinate the project activities that are being carried out in different countries.
1.14.3 Culture
The culture of an organization and the external environment of a project have a
significant impact on the success of the project. The culture includes the
organizational culture, work environment, and the culture of various
stakeholders of the project. The project manager should have an in-depth
understanding of the organizational culture as it has a direct influence on the
functioning of the project. The organizational environment and culture depend
on – the philosophy and managerial style of the top management; the
organizational structure of the project (functional, project-based, or matrix); the
character and maturity level of project team members i.e., achievement level,
motivation level, etc.; and the size of the project.
The culture of the project team members (their values, beliefs and convictions)
influences their attitudes towards ethics, achievement, training and supervision
and their interpersonal, problem-solving and conflict resolution skills. It also
determines their level of motivation. A good understanding of different cultural
values, languages, and special business styles and techniques would be an asset
for a project manager, especially when handling international projects.
19
1.15 Environmental and Legal Influences

Environmental and legal concerns have a major impact on the successful
completion of a project. Therefore, the impact of the environment on the project
should be assessed before and after a project has been undertaken. In addition,
analyzing the impact of a future project on the environment will help the project
manager define rational goals for the project and the organization.
The project manager should acknowledge these regulatory processes as a part of
good planning, instead of regarding them as barriers to the achievement of
project goals. The project manager should obtain the necessary clearances from
environmental protection agencies before starting the project. If possible, he
should integrate these regulations (legal, environmental, etc.) into the overall
plan of the projects.
All the projects should comply with all aspects of the law. Organizations usually
take the help of legal advisors to ensure that the activities of the project manager
and his team are in compliance with the law. Legal advisors must also ensure
that the project has applied for and received all the required permits and licenses.
1.15.1 Safety Focus in Project Management:

Safety has become a key consideration in Project Management. Many projects
are currently being executed in automobile and infrastructure sectors. Safety is
usually taken for granted in them, especially in such projects involving
construction activities where unskilled and semiskilled labour are employed.
Notwithstanding the public concerns, there is a need for tightening safety
management systems in all operations as environmental concerns became an
integral part of safety management. Global standards and guidelines are
available to ensure compliance and certification. It has been adequately
established that safety, like quality is a cultural issue and flows from top to
bottom, calling for commitment, participation and support of top management.
Safety is a major aspect in ensuring quality of work life and has a significant
influence on the productivity of employees. In these days of outsourcing as an
operations strategy, vendor qualification and ensuring vendor’s commitment and
compliance to safety is equally important in operations management while
executing critical projects
Safety in Transportation Systems: Vehicle safety is undergoing revolutionary
changes in the light of technological advances. Safety is a key driver in the
emergence of a new stage of intelligent transportation systems. Safety should
therefore receive top priority while ensuring customer focus in supply chain
management.
Safety Systems: Passive and Active systems are the two major categories in
vehicle safety. Passive safety is relatively mature both as a concept and
technology and active safety is progressing. The future may see info-safety based
on Information Communication Technologies, governing the vehicle safety
20
landscape followed by connected mobility. All these developments influence the

customer focus on safety. Frequent recall of vehicles by automobile
manufacturers due to safety related issues stresses the need for focus on vehicle
safety. The evolutionary trends in vehicle safety may be summarized as follows:
Stage Main Features Current Status Remarks

Passive Focus on Becoming The improvements
safety containing damage predictive so that in vehicle safety
in case of accident. safety gadgets like are mainly due to
Foundation of seatbelts, airbags the initiatives of a.
vehicle safety. etc. can react to automakers and
Includes bumpers, possible accidents suppliers and b.
crumple zones, in more Regulators and
airbags, seatbelts, sophisticated ways safety evaluation
head restraints and organization’s
shoulder harnesses. Seatbelt was
Advances in introduced by
vehicle safety are Volvo in 1959.
mainly in this area
Active Focus on Active safety Speed of
Safety preventing damage systems are largely implementation
by sensing dangers. deployed in luxury depends upon a.
Uses information cars at present and Introduction of
obtained from are expected to safety assessments
surroundings trickle down to and b.
(traffic, road other vehicles. Endorsement of
configuration and Ford introduced active safety
condition, nearby active safety features by service
objects etc.) and features in low providers such as
works along with priced cars like insurance (lower
passive systems to Ford Fusion. premiums) or
mitigate damage in leasing companies
the event of an (reduced repair
unavoidable costs and low
collision. Major downtimes,
objective is to yielding higher
prevent human profits). Active
error. The safety systems rely
predictive capacity heavily on high-
of active safety is a tech electronics
result of the use of both for hardware
advanced sensors, and software. This
radars and brings in new
cameras. players to the value
chain.
21
Stage Main Features Current Status Remarks

Info- Enables the sharing Used in higher end This is the concept
safety of information vehicles and is now behind V2X
gathered by the extending to all technology
sensors between types. (vehicle to other
vehicles and vehicles,
vehicles and their infrastructure,
surroundings to roads etc.). This is
increase safety called info-safety
further. as an integral part
of networked
mobility
environment.
Connected Comprises Integration of It is the next stage
Mobility information mobile sensors is in the evolution of
sensors, portals and expected to expand intelligent
centers throughout coverage and foster transportation.
the environment, quicker reaction While active safety
which together can times to changes in systems are
sense, exchange, a situation. currently geared
compile, process mainly for
and store passenger vehicles,
information for it will extend to
further use. buses, trucks and
personal mobility
vehicles.
1.16 Project Phases and the Project Life Cycle
Organizations generally divide a project into various project phases to help

management have better control over the project and to coordinate the project
activities with those of the organization. All the project phases put together
comprise the project life cycle.
1.16.1 Project Phases
A project phase is a collection of related project activities, which result in the
production of one or more major project deliverable. These phases are arranged
in a sequence to enable better understanding of the project. A review of the
performance of the deliverable is conducted at the end of every project phase to
check if the project can proceed to the next phase, and to identify and correct
mistakes in a cost-effective manner. All the activities of a project can be
classified into five phases – initiate, plan, organize, control, and close.
1.16.2 Project Life Cycle
The project life cycle is a collection of generally sequential project phases. The
number of project phases is determined by the control needs of the project
organization. The project life cycle represents the linear progression of a project,
22
from defining the project, through developing a plan, implementing the plan and
closing the project. A project life cycle usually specifies the technical work that
must be carried out in various phases of the project and the list of individuals and
their roles in each phase of the project. The project life cycles of many projects
share some common characteristics:
 The manpower and finances required in the initial stages of the project are low.
They increase as the project progresses and gradually decrease as the project
nears completion.
 The project starts with a very low probability of success. The probability of
success increases as the project passes through various phases and nears
completion.
 Project stakeholders are very influential at the beginning of the project. Their
influence decreases as the project progresses.
 The cost of incorporating change requests and correcting mistakes increases as
the project comes to an end.
Check Your Progress

26. _____________ are measures for judging the quality of products. These are
documented and approved by a recognized agency.
a. Codes
b. Standards
c. Procedures
d. Regulations
27. From the following options, identify the factor that influences the
environment and culture of an organization, which, in turn, can have a
significant impact on the success of the project.
a. Level of socialization in the organization
b. Type of technology used in the organization
c. Philosophy and managerial style of the top management
d. Cost involved in the project
28. A project life cycle is
a. a collection of project processes
b. a collection of project phases
c. a collection of project programs
d. a collection of project operations
29. Review of the performance of the deliverable is conducted at the end of
every project phase in order to:
i. check if the project can proceed to the next phase
ii. identify and correct mistakes in a cost-effective manner
23
iii. close the project

a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
1.17 Summary
 A project is a group of unique, inter-related activities that are planned and
executed in a certain sequence to create a unique product and/or service, within
a specific time frame, budget and the client’s specifications.
 Some of the characteristics of the tasks that qualify to be projects are unique
activities, attainment of a specific goal, sequence of activities, specified time and
interrelated activities.
 The primary aim of a project is to deliver a product and/or service to a client
within the specified time, budget (resources and cost) and according to the
quality and performance specifications. Some common constraints that
influence a project are scope, quality, time, cost, and resources.
 The scope and quality of a project are influenced by a variety of constraints like
time, cost and availability of resources. The success of a project largely depends
on the project manager’s ability to keep the dynamic system (project) in
equilibrium according to the changes arising from within and outside the project
system.
 Projects can be classified based on their characteristics such as business value,
risk level, time span, complexity of tasks and the monetary value of the project.
 A program is a group of projects managed in a coordinated way to obtain
benefits not available from managing them individually. Since a program is a
collection of different projects, it has wider scope than an individual project.
 Project management is the application of knowledge, skills, tools and techniques
to project activities in order to meet or exceed stakeholder needs and
expectations.
 Project management has evolved as a specialized science over a period of time,
though it has derived most of its knowledge from other management disciplines.
 Project management like general management involves all aspects of planning,
organizing, implementing, and controlling, apart from techniques like critical
path analysis and work breakdown structures that are unique to its own.
 In many strategic projects, the function of project management will involve
disciplines like finance, personnel, operations, purchase and logistics, R&D, and
marketing.
 The project manager has to maintain good relations with line managers to ensure
a smooth flow of resources. He/she should exercise judicious control over the
resources allocated to the project from various functional departments.
24
 Project stakeholders are individuals and organizations who are actively involved
in the project, or whose interest may be positively or negatively affected as a
result of project execution or successful project completion.
 The major stakeholders of any project include project manager, customers,
project team member, sponsor, and parent organization.
 Organizations that initiate a project will have an influence on the
implementation of the project. Some of the major aspects of large organizations
that influence projects are – organizational systems, organizational culture and
style, and organizational structure.
 A wide range of socio-economic issues influence projects such as standards and
regulations, internationalization, and culture.
 Impact of the environment on the project should be assessed before and after a
project has been undertaken. Also, analyzing the impact of a future project on
the environment will help the project manager define rational goals for the
project and the organization.
 Organizations generally divide a project into various project phases to help
management have better control over the project and to coordinate the project
activities with those of the organization. All the project phases put together
comprise the project life cycle.
 A project phase is a collection of related project activities, which result in the
in a sequence to enable better understanding of the project.
 The project life cycle is a collection of generally sequential project phases. It
represents the linear progression of a project, from defining the project, through
developing a plan, implementing the plan and closing the project.
1.18 Glossary
 Functional organization structure: A hierarchical structure in which the
employees are grouped into departments according to their areas of
specialization, e.g., mechanical, engineering, electrical engineering, production,
marketing, accounting etc.
 Matrix organization structure: A hierarchical structure that combines the
characteristics of functional and project-based organizational structures. The
project managers and functional managers are jointly responsible for assigning
priorities and for directing the work of individuals assigned to projects.
 Program: A group of projects managed in a coordinated way to obtain benefits
not available from managing them individually.
 Project life cycle: A collection of generally sequential project phases. The
number of project phases is determined by the control needs of the project
organization.
 Project management: The application of knowledge, skills, tools and
techniques to project activities in order to meet or exceed stakeholder needs and
expectations.
25
 Project phase: A collection of related project activities, which result in the

in a sequence to enable better understanding of the project.
 Project stakeholders: Individuals and organizations who are actively involved
in the project, or whose interest may be positively or negatively affected as a
result of project execution or successful project completion.
 Project: PMI defined project as a temporary endeavor undertaken to create a
unique product or service. The British Standard 6079 of 1996 (BS6079) defined
a project as a unique set of coordinated activities, with definite starting and
finishing points, undertaken by an individual or organization to meet specific
objectives within defined schedule, cost, and performance parameters.
 Project-based organization: A hierarchical structure in which the project
manager has the authority to assign priorities and to direct the work of
individuals assigned to the project. Most of the organization’s resources are
allotted to various projects. These organizations also have functional
departments, but the groups working in these departments report directly to the
project manager and help in the execution of various projects.
 Regulations: Mandatory guidelines that lay down the necessary characteristics
of products or services. These are usually drafted by various governmental
regulatory agencies and are enforced by the regulatory personnel.
 Scope: A brief and accurate description of the end-products or deliverables to be
expected from the project that meet the requirements. It describes all the
activities that are to be performed, resources that will be consumed, and the end-
products from the successful completion of the project, including the quality
standards.
 Sponsor: An individual or a group within the parent organization who arranges
the resources for the project themselves. This assistance can be in cash or kind.
 Standards: Measures for judging the quality of products. They specify the rules
and guidelines that organizations must observe when producing a product or a
service.

1. Projects have been planned and managed since the beginning of civilization.
Define a project. Explain the characteristics of a project. How are the
projects different from operations?
2. The success of a project depends on the ability of the project manager to
strike a balance between the various project parameters. What are the
parameters of a project? In what way are these parameters related to each
other. In what way can the projects be classified?
3. ‘A program is a collection of different projects, and it has wider scope than
an individual project.’ Substantiate the given statement.
4. Project management has spread from its traditional focus on the fields of
construction and engineering into diverse sectors like education and
healthcare. What is project management? How is it related to the other
management disciplines? Explain its relationship with the line management.
26
5. The project management team should identify the stakeholders, determine

their needs, and manage these needs to ensure a successful project. Who are
these project stakeholders? In what way are they important to a project?
6. Organizations that start a project will have an influence on the
implementation of the project. What are the various organizational issues
that influence a project?
7. The project team should be aware of the socio-economic, environmental and
legal issues that influence a project. Describe in detail these influences.
8. Dividing a project into various phases helps the management to gain control
over the project. What is a project phase? Explain a project life cycle and its
characteristics.

1. Prasanna Chandra, “Projects,” Mcgraw Hill, Seventh Edition, 2009.
2. Robert K. Wysocki, “Effective Project Management: Traditional, Agile,
Extreme,” Wiley India, 2009.
3. Jack R. Meredith and Samuel J. Mantel Jr., “Project Management: A
Managerial Approach,” Sixth Edition, Wiley India, 2008.
4. Harold Kerzner, “Project Management – A Systems Approach to Planning,
Scheduling and Controlling,” Second Edition, 2006.
5. “A Guide to the Project Management Body of Knowledge,” Project
Management Institute, Second Edition, December 2000.
6. Joseph Weiss and Robert K. Wysocki, “Five-phase Project Management: A
Practical Planning and Implementation Guide,” Basic Books, 1992.

Following are the answers to the Check Your Progress questions given in the
unit.
1. (d) i, ii, iii, and iv
Project management is a system of procedures, practices, technologies, and
know-how that helps in the planning, organizing, staffing, directing, and
controlling necessary to successfully manage a project. Traditionally,
project management focused on the construction and engineering sectors. Of
late, it is being widely used in diverse sectors like education, healthcare, and
software development.
2. (b) Project Management Institute
executed in a certain sequence to create a unique product or service, within a
specific time frame, budget, and the client’s specifications. The Project
Management Institute’s (PMI) publication ‘A Guide to the Project
Management Body of Knowledge,’ has defined a project as “a temporary
endeavor undertaken to create a unique product or service.”
27
3. (c) Project
executed in a certain sequence to create a unique product or service, within a
specific time frame, budget, and the client’s specifications. Operations refer
to the operating end of the business, where resources are transformed into
goods and services. A process is a series of activities that brings about a
result. A program is a group of projects managed in a coordinated way to
obtain benefits not available from managing them individually.
4. (d) i, ii, and iii
Projects and operations are generally considered similar. Both are carried
out by people. They are both planned, implemented, and controlled to
produce results within the given resource constraints.
Organizations adopt the project approach when they have to perform tasks
that are new to them. This approach is also adopted when the tasks are not
likely to be repeated in the future, and when the existing systems in the
parent organization are not equipped to handle the new task.
6. (c) A project consists of various technical activities that are independent
and unrelated
Projects consist of various technically interrelated activities. These activities
are considered interrelated as the deliverable (output) of one activity
becomes the input for another activity of the project.
7. (b) Scope
Scope is a brief and accurate description of the end-products or deliverables
to be expected from the project that meet the requirements. It describes all
the activities that need to be performed, resources that will be consumed,
and the end-products from the successful completion of the project,
including quality standards.
The various project parameters are scope, quality, cost, time, and resources.
Resources in a project comprise the people resources, the financial
resources, the physical resources, and the information resources. These
resources are required to carry out the project activities.
9. (c) Recruitment of new employees in the organization
Projects usually go off balance when clients ask for changes in their time
frame, scope, and quality. Some of the reasons for projects going off-
balance could be change in market demand that requires the addition of new
features, product needing to be launched ahead of due date due to
competition, loss of key personnel, breakdown of machinery, new
technology expected in the market, etc. Recruitment of new employees in
the organization will not make a project go off balance.
28
10. (b) Purchase management
Project management usually follows five major phases, namely, the

initiating phase, planning phase, implementation phase, controlling phase
and closing phase. The initiating phase identifies the beginning of a project.
The planning phase involves designing and maintaining a realistic and
achievable plan to attain the business objective. The implementation phase
involves managing all the coordination and resource requirements to
implement the plan. The controlling processes include reviewing and
measuring project progress and implementing corrective measures when
needed. The closing phase includes the formal submission of the project to
the client to give the project or phase a structured ending. Purchase
management is an operations activity and is not a phase in project
management. It is a process carried out by the operations manager of an
organization.
11. (b) Program
A program is a group of projects managed in a coordinated way to obtain

benefits not available from managing them individually. It is a collection of
different projects. It has wider scope than an individual project. A process is
a series of activities that brings about a result. Operations refer to the
operating end of the business, where resources are transformed into goods
and services.
12. (d) Research and Development
The Research and Development discipline of project management takes care

of new product development and quality assurance functions, in case of
strategic projects.
13. (c) Project management involves managing the existing systems and
services in an organization.
Line management involves managing the existing systems and services in an

organization. The other options come under project management.
Functional employees selected from various departments usually face a

difficulty in reporting to multiple bosses. A major source of conflict that
could arise between the project managers and the line managers is the issue
of who should have control over the functional employees. The relations
will be under further strain when any one of them claims sole credit for the
success of the project or for the rewards generated by the project. These
conflicts can be resolved when the project and line managers understand
their distinct roles in achieving the overall organizational objectives.
29
Project stakeholders are those who are directly related to the project –
suppliers, clients, employees, and managers; those who can influence the
physical, organizational, technological, socioeconomic, legal, and political
environment; those who have an authoritative relationship with the project –
government agencies at the local, regional, and national levels; and persons,
groups, and associations that have a stake in the project.
16. (a) Arranging the resources for the project
The project manager is an important stakeholder of the project. He/she is

responsible for channelizing the project’s resources, developing the project
plan, and ensuring that the project activities are completed on time, within
the budget, and according to quality standards. The resources for the project
are arranged by the sponsor, who could be an individual or a group within
the parent organization.
17. (b) customers who are external to the company but are not the final
users of the product.
Customers are those who will use or pay for the product or service produced
by the project. These customers may be internal or external to the
organization. Internal customers are those individuals who are internal to the
parent company. Intermediate customers are usually external to the
company but they are not the final users of the product or service. External
customers are the individuals or organizations who pay for the final product
or service and use.
18. (b) internal, intermediate or external
Customers are the project stakeholders who will use or pay for the
deliverable produced by the project. They can be internal or external to the
organization. Internal customers are individuals who are internal to the
parent company. The production department is an internal customer. In the
given instance, the production department will be the internal customer of
the project as it will use the machine. The company wants to sell the product
to outside customers. These can be intermediate customers (distributors or
wholesalers who will not be the final users of the machine) or external
customers (individuals or organizations who will pay for and use the
machine) to the project.
19. (c) Only ii
All the groups and individuals who devote time, skills, and effort to the
project are regarded as project team members. Project team members take
care of the technical, managerial, or the administrative aspects of a project.
They work directly with or under a project manager, depending on the way
the project is organized.
30
20. (b) Only i and iii

Project team member are individuals and groups who devote their time,
skills, and effort to the project. They look after the technical and managerial
or administrative aspects of a project. The team members who look after the
technical aspects of a project carry out activities concerned with
engineering, construction, procurement, and quality and performance
testing. Activities concerned with planning, scheduling, budgeting,
preparing status reports, managing project communication, etc., are carried
out by team members who are in charge of the administrative aspects of the
project.
21. (c) Preparing status reports
Project team member are individuals and groups who devote their time,
skills, and effort to the project. They look after the technical and managerial
or administrative aspects of a project. Activities concerned with planning,
scheduling, budgeting, preparing status reports, managing project
communication, etc., are carried out by team members who are in charge of
the administrative aspects of the project. The team members who look after
the technical aspects of the project carry out activities concerned with
engineering, construction, procurement, and quality and performance
testing.
22. (c) Sponsor
The sponsor is an individual or a group within the parent organization who
arranges the resources for the project. This assistance could be in cash or in
kind. The project manager is responsible for channelizing the project’s
resources; developing the project plan; and ensuring that the project
activities are completed on time, within the budget, and according to quality
standards. Customers are those who will use or pay for the deliverable
produced by the project. The parent organization is a major stakeholder of
the project as its employees are directly involved in executing the project.
Organizations that initiate a project will have an influence on the
implementation of the project. These organizational influences even act on
projects that have been initiated by joint ventures or partnerships. Some of
the major aspects of large organizations that influence projects are
organizational systems, organizational culture and style, and organizational
structure.
A functional organization has a hierarchical structure. In such a structure,
superior-subordinate relationships are clear, i.e., the line of control is clearly
defined. The employees are grouped into departments according to their
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areas of specialization. Functional organizations also work on projects, but

their project activities are limited to a single function.
25. (a) The project manager has the authority to assign priorities and to
direct the work of individuals assigned to the project.
In a project-based organization, the project manager has the authority to
assign priorities and to direct the work of individuals assigned to the project.
Most of the organization’s resources are allotted to various projects. These
organizations also have functional departments, but the groups working in
these departments report directly to the project manager and help in the
execution of various projects.
26. (b) Standards
Standards are measures for judging the quality of products. These are
generally documented and approved by a recognized agency/body.
Standards specify the rules and guidelines that organizations must observe
when producing a product or a service.
27. (c) Philosophy and managerial style of the top management
The organizational environment and culture depend on the philosophy and
managerial style of the top management, the organizational structure of the
project, the character and maturity level of project team members, and the
size of the project.
28. (b) a collection of project phases.
The project life cycle is a collection of generally sequential project phases.
A project phase is a collection of related project activities, which result in
the production of one or more major project deliverables. These phases are
arranged in a sequence to enable better understanding of the project.
29. (a) Only i and ii
A project phase is a collection of related project activities, which result in
the production of one or more major project deliverable. These phases are
arranged in a sequence to enable better understanding of the project. A
review of the performance of the deliverable is conducted at the end of
every project phase to check if the project can proceed to the next phase and
to identify and correct mistakes in a cost-effective manner.
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Unit 2
Project Idea Generation and Screening
Structure
2.1 Introduction
2.2 Objectives
2.3 Generating Project Ideas
2.4 Creativity and Idea Generation
2.5 Scanning the Environment
2.6 Searching for New Project Ideas
2.7 Initial Screening
2.8 Project Rating Index
2.9 Sources of Positive Net Present Value
2.10 Summary
2.11 Glossary
2.15 Answers to Exercises
2.1 Introduction
In the previous unit, we have discussed about the fundamental concepts of
project management. We have also discussed about the project management
environment. In this unit, we will discuss how to generate project ideas and
screen them.
When developing a new project, the project manager generates several ideas
from different sources like customers, employees and competitors, and finally
selects those project ideas that can be implemented. The generation of ideas
requires creativity, sensitivity to the changes in the external environment and
assessment of firm’s capabilities for any individual. So, the project manager has
to be aware of several techniques like attribute listing, checklist and
brainstorming for generating new project ideas.
After the ideas have been collected, the project manager has to screen them. The
objective of screening is to drop the poor ideas at the initial stages of new project
development. Project Rating Index, an initial evaluation method, helps
management streamline the process of initial screening. Net Present Value
(NPV) is used to conduct a financial analysis of projects. In the case of financial
projects, the projects with higher NPV are selected.
This unit deals with the generation of project ideas and discuss the various
creativity techniques involved in the generation of ideas. We will discuss the
scanning of the business environment, and the activities that can be carried out to
generate new project ideas. We shall then move on to discuss the initial
screening of project ideas and about the project rating index. Finally, we would
be discussing the factors that can be used by firms to enhance the net present
value of a project.
2.2 Objectives
 identify ways to generate project ideas.

 define creativity, and state how it can be used for generating project ideas.
 assess the strengths, weaknesses, opportunities, and threats of an organization by
scanning the business environment in which it is operating.
 explain how to search for new project ideas.
 perform the initial screening of new project ideas.
 explain the project rating index.
 identify the sources of positive net present value.
2.3 Generating Project Ideas

Changing customer needs and preferences, new technologies, shortened product
life cycles and increased competition force the project manager to be innovative.
The project manager always has to be on the look out for new ideas since an idea
that seem unattractive at one point can look appealing later. Most project ideas
except those arising from technological breakthroughs involve combining
existing fields of technology or adding more features to the present products or
services.
New project ideas help firms achieve their objectives in an efficient manner.
Ideas can come from different sources like customers, competitors and
employees and even from accidents or luck. They can be derived from various
sources, but it is the duty of the project manager to ensure that the chosen idea
for a new or modified product or a service can really cater to a present unmet
need. The project manager should also ensure that the product based on that idea
can effectively compete with similar products or services through features like
better quality or lower price.
Before deciding whether an idea is worth pursuing, the project manager must gather as
many ideas as possible. Since only a few ideas succeed commercially, most of the
firms develop purposeful, systematic approaches for generating new project ideas.
Several firms foster an organizational climate that encourages employees to come up
with new, creative ideas.
Customer needs and interests are the logical place to start the search for new
project ideas. Many of the best ideas have come from customers’ answers to
different questions. The project manager can conduct customer surveys and
interview the customers to find out their problems with current products. Through
34
customer interviews, the project manager can learn about customer needs. Several
companies maintain an open culture that encourages a free flow of ideas from all
its employees. Companies also discover good ideas by thoroughly examining their
competitor’s products and services. Project manager analyzes the competitor’s
processes so that they can refine them.
Example: Encouraging Creativity through Culture at Xerox

The organizational culture posed a potential obstacle to creativity at Xerox’s
Palo Alto Research Center (PARC). The chief scientist John Seely Brown
(Brown) found that the existing culture did not support radical innovation.
When Brown took over PARC in 1988, he worked towards building a culture
that promoted creativity. A plan called Xerox 2000 was prepared, which
provided a strategic view of where the organization would be in the year
2000. Anthropologists were hired to study the organization and to reveal the
hidden interests of the employees. John aimed at adjusting the organizational
structure, awarding incentives and so on by launching a program called
“Good Start’ to create a new organization. The result was an organization that
comprises a mix of new and old employees with a common culture that was
more supportive of rapid innovation.
Adapted from Stoner, Freeman, Gilbert, “Management,’ Prentice-Hall of India, Sixth
Edition, 1995, p.428-429.
Check Your Progress

1. Of the following stakeholders, who help the project manager in generating
new project ideas?
i. Customers
ii. Competitors
iii. Employees
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
2. Which of the following techniques does a project manager use to conduct a
financial analysis of projects?
a. Break-even analysis
b. Attribute Listing
c. Net Present Value
d. Program Evaluation and Review Technique
3. Screening is done to
a. generate new project ideas.
b. drop the unviable ideas at the initial stages of new project development.
c. select a project with a higher net present value.
d. All of the above
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4. From the following options, identify the factors that help in generating
ideas.
i. Creativity
ii. Sensitivity to external environmental changes
iii. Assessment of firm’s capabilities by any individual
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
5. Identify the statement that does not hold true where the Net Present Value
(NPV) of a project is concerned.
i. NPV is the difference between the present value of the future revenues
minus future costs.
ii. In the case of financial projects, the projects with negative NPV are
selected.
iii. Superior technology, product differentiation, etc., help in enhancing the
NPV of a project.
a. Only i
b. Only i and ii
c. Only ii
d. Only ii and iii
2.4 Creativity and Idea Generation

Creativity refers to the ability of an individual or a group to develop something
new. It involves the ability to combine or synthesize the available information
and experience to see new patterns and possibilities. Creativity is best nurtured
in a liberal climate where everybody is encouraged to develop new ideas and
new ways of doing things. But few managers are able to create such a climate.
2.4.1 Stages of Creativity

The process of creativity involves four stages – preparation, incubation,
illumination and verification.
Preparation
In this stage, an individual gathers necessary information, defines the problem
precisely, analyzes the data and generates a number of alternatives.
Incubation
An individual comes out with unusual alternatives because of subconscious mental
activity coupled with divergent thinking. In this stage, an individual does not
consciously focus on the problem, but allows the subconscious mind to look for a
solution.
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Illumination
In this stage, an individual gets an insight into a problem all of a sudden while he
is thinking several alternatives. The practicability of this idea is then examined.
Verification
In this stage, the feasibility of the alternative ideas is examined. The ideas for
which the solutions are not feasible are rejected.
Creativity can be nurtured at two different levels – the individual level and the
group level. Organizations prefer to nurture creativity at the group level as it
ensures participation and acceptance of all the employees concerned.
2.4.2 Individual Creativity

It is not possible to establish a technique to enable someone to think creatively,
but the following methods have been found helpful in improving the creativity of
an individual.
 Attribute listing: In this method, the attributes that can be attached to the end
product or service are listed. Based on the listed attributes, the final product is
designed.
 Checklist: A checklist consists of a set of questions that are relevant to a given
situation. Answering to these questions can help the individual find a solution to
the problem.
 Black box: In this technique, all the required and available inputs as well as the
desired outputs are listed. It is also checked whether these outputs can be
produced through the use of available inputs.
Group Creativity
Organizations encourage group creativity to elicit more and better ideas. Some of
the popular group creativity techniques used by several organizations are discussed
below:
 Brainstorming: This technique encourages group members to generate as many
ideas as possible. Improving the ideas of other members and synthesizing two or
more ideas is allowed, but criticism of any idea is not entertained.
 Delphi technique: This is a structured approach for finding out the ideas and
opinions of a number of experts. A panel of experts is asked to generate ideas, at
the individual level, for a given issue. The information is collected, analyzed and
then summarized by the group facilitator. Then the summarized information is
given to each individual member, and then opinion is requested again. Again,
the information is collected and summarized. The process continues till the
entire panel of experts accepts a particular idea. The project manager is expected
to note down all the ideas that have been generated throughout the process for
further consideration.
 Nominal group technique: This is a structured technique administered by a
coordinator. All the individual members prepare their ideas independently. Then
they are requested to present the ideas before the other members, who rate the
ideas. The coordinator notes down all the ideas generated, including the positive
and negative arguments of each idea, for future use.
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Activity: Kamlesh Bharadwaj, an aircraft maintenance engineer with Kuwait

Airways came back to India after the Gulf War and started searching for a job. By
a strange coincidence, the manager of the garage where he was getting his car
serviced wanted him to sort out some technical problem with an imported car.
Bharadwaj saw that the facilities available at most of the garages were primitive
and imported cars required better servicing facilities. Bharadwaj realized that he
could start a garage for imported cars in India. He started an exclusive garage for
imported cars. Discuss some of the ways in which individuals/organizations can
get new project ideas.
Answer:
Example: The Delphi Method at BHEL

Bharat Heavy Electricals Limited (BHEL), the largest heavy-electrical equipment
company in India, uses the Delphi process to explore new ideas and to decide the
future direction of its systems. The process is carried out in three steps. In the first
step, an open-ended questionnaire is given to all the prospective respondents. All
the possible ideas regarding major technological breakthroughs for the next 30 to
40 years are gathered. The participants also mention when the technological
breakthrough is likely to occur. Then the coordinator collects the questionnaires
from all the respondents and prepares the list of technological breakthroughs and
its estimated timings.
In the second step, the summarized list of technologies with its expected
arrival is fed back to the participants. The participants are then asked to
reconsider their earlier time estimates and give new ones with proper reasons.
The information obtained at this stage provides a priority ranking for each
technological development in terms of the urgency of each requirement.
In the third stage, the participants are given the new information about
estimated timings that was collected in the second stage. In this stage, the
participants are asked for their final estimates with their rationale for their
forecasts. The company feels that the obtained ideas will be useful for
corporate planning.
Adapted from Kathryn M.Bartol & David C. Martin, “Management,” Prentice- Hall of
India Private Limited, Second Edition.
Check Your Progress

6. Which of the following is not a technique used for developing creativity in
an individual?
a. Attribute listing
b. Brainstorming
c. Checklist
d. Black box
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7. Identify the correct sequence of steps in the process of creativity from the
given sequences.
a. Illumination – Incubation –Verification – Preparation.
b. Preparation – Incubation – Illumination – Verification.
c. Incubation – Preparation – Illumination – Verification.
d. Verification – Preparation – Illumination – Incubation.
8. ___________ refers to the ability of an individual or a group to develop
something new, and involves the ability to combine or synthesize available
information and experience to see new patterns and possibilities.
a. Culture
b. Innovation
c. Creativity
d. Screening
9. In which technique do all individual members prepare their ideas
independently and present them before other members, who rate the ideas?
a. Brainstorming
b. Delphi technique
c. Nominal group technique
d. Black box
10. In which of the following stages in the creativity process does the individual
define the problem precisely, analyze the data, and generate a number of
alternatives?
a. Incubation
b. Preparation
c. Illumination
d. Verification
11. Identify the statement/s that explains/explain the characteristics of
brainstorming correctly.
a. Brainstorming is a structured technique administered by a coordinator.
b. Brainstorming is used for eliciting the ideas and opinions of a number
of experts for a given issue.
c. Brainstorming encourages group members to generate as many ideas as
possible, helps in improving ideas of other members, and allows
synthesizing of two or more ideas.
d. All of the above
12. Of the following options, which are true with regard to the activity carried
out in the verification stage in the creativity process?
i. The individual allows his/her subconscious mind to look for a solution.
ii. The feasibility of alternative ideas is examined.
iii. The ideas for which the solutions are not feasible are rejected.
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a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
13. ___________ is a structured technique administered by a coordinator in
which all the individual members prepare their ideas independently.
a. Black box
b. Brainstorming
d. Delphi technique
14. Identify the stage in the creativity process in which the practicability of the
idea generated is examined.
a. Preparation
b. Incubation
c. Illumination
d. Verification
15. In the incubation stage of the creativity process,
a. the individual gets an insight into a problem all of a sudden while
he/she is thinking about several alternatives.
b. the individual comes out with unusual alternatives because of
subconscious mental activity coupled with divergent thinking.
c. the individual gathers the necessary information, defines the problem
precisely, analyzes the data, and generates a number of alternatives.
d. the practicability of the idea generated is examined.
16. Of the following techniques, which is not used by organizations for
developing group creativity?
a. Brainstorming
b. Delphi technique
c. Black box
d. Nominal group technique
17. Of the following statements, identify those that hold true with regard to
creativity.
i. Creativity is the ability of an individual or a group to develop
something new.
ii. Creativity involves the ability to combine or synthesize available
iii. Creativity is best nurtured in a liberal climate where everybody is
encouraged to develop new ideas and new ways of doing things.
iv. Creativity can be nurtured only at the individual level.
40
18. Which of the following statements is false regarding the attribute listing
technique that organizations use to improve creativity in individuals?
a. All the required and available inputs as well as the desired outputs are
listed.
b. The attributes that can be attached to the end product and/or service are
listed and based on them the final product is designed.
c. Questions are developed and individuals have to answer these questions
to find a solution to the problem.
d. Both (a) and (c)
19. ______________ consists of a set of questions that are relevant to a given
situation, answering which helps the individual find a solution to the
problem.
b. Black box
c. Delphi technique
d. Checklist
20. Which of the following techniques involves finding out the ideas and
opinions of experts?
a. Black box
b. Brainstorming
d. Delphi technique
21. Identify the technique in which all the required and available inputs as well
as the desired outputs are listed. It is also checked whether these outputs can
be produced using the available inputs.
a. Checklist
b. Black box
c. Attribute listing
d. Delphi technique
2.5 Scanning the Environment

Before accepting a project, a firm must conduct a corporate appraisal. A realistic
appraisal of corporate strengths and weaknesses provides for exploiting the
opportunities in the environment. Firms use their competitive strengths to exploit
the opportunities available. Most firms conduct a SWOT analysis to identify
their strengths and weaknesses, and the opportunities and threats in the business
environment. Firms take advantage of the market opportunities through use of
their strengths. For the purpose of scanning the environment, the whole business
environment may be divided into six broad sectors: economic sector,
governmental sector, technological sector, socio-demographic sector,
competition sector, and supplier sector. Each of these sectors is discussed below.
41
2.5.1 Economic Sector

The economic sector comprises the macro level factors like the state of the
economy, the overall rate of economic growth, the growth rate of primary,
secondary and tertiary sectors, position of BoP (Balance of Payment) and trade
deficit/surplus of the country. The project manager should also analyze the
economic environment to assess the viability of new project ideas.
The project manager should also closely observe the major trends in the income
and consumption patterns of the target customers. A study of consumer
expenditures can reveal several important facts. Such information can be useful
when the project manager has to take the financial decisions.
2.5.2 Governmental Sector

The economic and industrial policies of the government have a great impact on
the business. These policies can have a favorable impact on some categories of
business and an adverse impact on some other categories of business.
For example, the liberalization, privatization and globalization policy adopted by
the Indian government in 1991, has had a significant impact on several markets.
Exports and imports increased and the Balance of Payments (BoP) situation
improved.
The policy has benefited many companies. Because of less regulation, many
firms have changed their product mix and increased production capacity. Some
companies, however, have been adversely affected by the increase in
competition.
2.5.3 Technological Sector

The study of technological sector is important, as technology can effectively be
used to develop new materials and machines for increasing the production of
goods and services. Since new foreign and indigenous technologies are emerging
rapidly, the project manager should ensure that he has access to the latest
information.
Technological changes often take place to meet changing customer needs.
Because of a rise in petrol prices, many customers preferred to purchase cars that
give more mileage. As a result, the automobile manufacturers had to design fuel-
efficient vehicles. Similarly managers should develop new technologies to meet
the needs and interests of the customers.
2.5.4 Socio-demographic Sector

A study of socio-demographic sector involves the study of population growth,
age shifts in population, educational profile of the people, gender composition,
and religious interests. During the industrial revolution, western countries faced
the problem of labor supply due to low population growth. This situation
encouraged the growth of labor saving technologies and automation.
42
Today, many multinational corporations are investing in developing countries to

take advantage of the cheap labor and large consumer markets. Project manager
should understand all the above aspects while setting the objectives of the
project and in preparing the relevant procedures.
2.5.5 Competition
The project manager should carefully analyze the competition in the market to
design a successful project. He should be aware of the number of firms in the
industry and the degree of homogeneity and differentiation among their
products. The effect of complementary and substitute products on the end
product or service should also be analyzed. Information on and understanding of
all the above issues enables the project manager to prepare necessary plans to
sustain themselves in the face of cut-throat competition.
2.5.6 Supplier Sector
The project manager should carefully analyze the input requirements for carrying
out the project. He should be aware of the availability and cost of raw materials
and other requirements like power and water. The project manager should ensure
that the firm has good contractual agreements with all its suppliers so that all the
necessary goods are delivered on time.
2.6 Searching for New Project Ideas
A wide variety of sources should be tapped to get good project ideas. Project
managers perform numerous activities to generate more and more project ideas.
These activities are discussed below.
2.6.1 Study the Existing Industries
A study of existing industries enables the project manager to assess the

performance of various industries in terms of their profitability and capacity
utilization. A project manager should identify and implement more profitable
and risk-free activities so that the probability for success of a project increases.
He should also try to identify those markets where the demand is going to be
high relative to supply in near future.
2.6.2 Observe the Inputs and Outputs of Various Industries
An analysis of inputs and outputs of various industries can provide new project
ideas. A project opportunity exists when materials that are expensive or difficult
to procure can be obtained at a low cost from a manufacture who enjoys
economies of scale. An opportunity also exists when the waste products of
certain firms can be used to develop a new product. For example, flyash, a by-
product of coal- fired electric generating plant, is now used to improve the
performance and quality of concrete.
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2.6.3 Analysis of Imports and Exports

The project manager should study the imports and exports that have taken place
over the last five to seven years to understand the import trends of various goods.
This will enable him to identify the potential areas for import substitution. The
project manager can also plan for getting governmental benefit as part of its
program to encourage indigenous manufacturing.
Analysis of exports also helps the project manager to explore the profitable
foreign markets. Indian software products have lot of demand in the western
markets. This makes project manager think of different plans in the software
industry, considering its potential in the foreign markets.
2.6.4 Study of Economic and Social Trends

A study of the current economic and social trends can help the project manager
understand changes in customer preferences. For instance, because of the
increase in nuclear, double-income families, demand for time saving products
like pressure cookers, microwave ovens and canned food items has grown. As
the desire for leisure and recreational activities is increasing, there is a growing
demand for products like Audio Compact Disks, Video Compact Disks and
Digital Versatile/Video Disks.
2.6.5 Observe New Technologies

India has a large network of research laboratories. The project manager should
closely examine the new research work carried out in those laboratories. Since
technology only can really bring new products, project manager can generate lot
of ideas to develop breakthrough products. A project manager can organize tie-
ups with research institutions to develop new products.
2.6.6 Identifying Psychological Needs

Questionnaires and interviews cannot reveal every need and interest of the
customers. Therefore the project manager should carefully identify the hidden
demands and psychological needs of customers. He can use a special technique
called Spectrum analysis.
Spectrum analysis enables the project manager to identify the gaps between the
consumers’ psychological needs and the needs met by the existing products. In
Spectrum analysis, the important factors influencing customers’ brand
preferences are identified and then the existing brands in the market are placed
on a continuum in respect of the factors identified by the customers. Then the
project managers attempt at identify the gaps relative to the listed psychological
needs.
2.6.7 Study the Government Guidelines and Recommendations for

Financial Institutions
The government continuously encourages new project outlays in different
sectors. These outlays provide profitable areas where new initiatives can be
taken up. A study of these outlays of the government generates new project
44
ideas. Recommendations made by financial corporations or state industrial

development corporations should be carefully analyzed to identify the areas to be
considered. The feasibility studies and suggestions of research agencies help the
project manager to identify promising project ideas.
Above all, the project manager should attend trade fairs to know about new
products and current developments. Chance also plays an important role in
identifying the new project initiatives. When KVK Raju, founder of the
Nagarjuna Group, visited the Bokaro Steel Plant, he came to know that the
factory was going to lose a Rs. 60,000 tonne order for hot rolled coil, because of
its sub-standard packaging. This incident prompted him to set up an exclusive
industry to cater to the packaging needs of the steel industry.
Check Your Progress

22. Which of the following activities can aid in searching for new project ideas?
i. Studying existing industries
ii. Observing new technologies
iii. Analyzing the imports and exports
iv. Identifying psychological needs
23. Of which of the following sectors does the scanning environment comprise
macro level factors like the growth rate of the primary, secondary, and
tertiary sectors; Balance of Payments position; and trade deficit/surplus of
the country?
a. Competition sector
b. Economic sector
c. Governmental sector
d. Socio-demographic sector
24. A corporate appraisal should be conducted
a. before the environment is scanned.
b. before a project is accepted.
c. before idea generation.
d. All of the above
25. Arrange the following sentences based on the sequence in which the project
manager conducts a spectrum analysis.
i. The important factors influencing customers’ brand preferences are
identified
45
ii. The project managers attempt to identify the gaps relative to the listed
psychological needs
iii. The existing brands in the market are placed on a continuum in respect
of the factors identified by the customers
a. iii-ii-i
b. i-iii-ii
c. ii-i-iii
d. i-ii-iii
26. A study of which of the following sectors involves the study of population
growth, age shifts in population, educational profile of the people, gender
composition and religious interests?
a. Competition sector
b. Economic sector
c. Socio-demographic sector
d. Governmental sector
27. Which of the following techniques enables the project manager to identify
the gaps between the consumers’ psychological needs and the needs met by
the existing products?
a. Black box
b. Brainstorming
c. Spectrum analysis
d. Project rating index
2.7 Initial Screening

After a pool of ideas has been generated, the project manager must screen them.
In this phase, the ideas that have limited commercial potential or do not match
the firm’s objective are rejected. Initial screening is a process of rejection rather
than a process of selection. The objective is to reject those ideas that cannot be
considered for implementation. Ideas can be screened in a variety of ways. Some
managers use an informal screening process to eliminate unsuitable ideas. A
formal screening process involves a checklist, rating system, and an economic
analysis.
When screening ideas, the project manager must avoid two types of errors; drop
error and go error. A drop error occurs when a company rejects a good idea. The
project manager should review ideas that have been rejected to avoid a drop
error. If a project manager makes too many drop errors, it reveals that the
manager is too conservative. A go error occurs when the project manager
permits a poor idea to move into the development and commercialization phase.
Since costs rise substantially with each successive development stage, poor ideas
have to be dropped as early as possible.
46
Example: Stage-Gate System at 3M

Minnesota Mining and Manufacturing (3M) fosters a culture of innovation
throughout the firm. The company manages the innovation process through a
sophisticated tool called ‘stage-gate system’. In this system, the entire innovation
process is divided into several stages. There will be a gate or check point at the
end of each stage. The project leader, who works with a cross-functional team,
brings a set of known requirements to each gate before the project passes from
one stage to the next stage. The project leader also performs a technical appraisal,
competitive analysis and a market study of customer interests and preferences.
Senior managers review the criteria at each stage to judge whether the project
deserves to move to the next stage. Finally, the gatekeepers make one of four
decisions: go, kill, hold or recycle.
The idea is passed to the next stage in a ‘go’ decision, completely rejected in
a ‘kill’ decision, considered in the future in a ‘hold’ decision. In a ‘recycle’
decision, the process is repeated. Since all the steps are visible to all the
people involved, these systems put a strong discipline into the innovation
process. Lego, the Danish toy maker follows the same procedure to replace
about one-third of its product line with new products every year.
Adapted from Philip Kotler, “Marketing Management,” Prentice Hall of India Private
Limited, Millennium Edition p. 333-334.
The project manager must consider the following aspects to eliminate ideas that
are not promising:
2.7.1 Acceptable Risk Level

Assessment of the level of risk associated with a selected idea is a factor
considered during the initial screening. Particularly in large infrastructural
projects, the management considers the levels of risk involved in the project. The
project manager has to consider factors like the project’s vulnerability to social
and environmental conditions, sustainability over long periods, government
policies and controls and expected cash inflows.
2.7.2 Reasonability of Costs

The project manager should ensure that the costs involved for implementing the
project are reasonable and that the project provides an acceptable level of profits.
An analysis of raw materials costs, labor costs, factory overheads and
administration costs provides a clear picture of total cost involved. Management
must ensure that these costs are within allowable limits.
2.7.3 Compatibility with Promoter

The project idea should be compatible with the interests and abilities of the
person who is promoting the project. Since the promoter provides the necessary
basic resources, the project manager must ensure that the project is acceptable to
him. He should discuss the underlying facts, risks involved and expected returns
of the project with the promoter to avoid any clashes later on. For any
intermediary problems, the project manager should consult the promoter to take
necessary steps.
47
2.7.4 Consistency with Government Priorities

The project manager should carefully screen the project ideas keeping in view
the priorities of the government. On several occasions, projects have been
terminated before completion because of their harmful effects on the society.
The project manager should therefore be familiar with all the rules and
regulations framed by the government concerning the issuance of licenses for
commencing a project and the import of raw materials from foreign countries.
2.7.5 Availability of Inputs

The project manager should consider the input requirements, their availability
and cost while screening project ideas. In India, many projects have to cope with
shortages of power and irregular supplies of required agricultural raw materials
like cotton, jute and oil seeds. Sometimes, many of the raw materials have to be
imported. So, the project manager should ensure in advance that all the necessary
input requirements for the project are available.
2.7.6 Adequate Market Demand

The project manager should estimate the potential for growth and the return on
investment for the proposed project ideas. Obviously all firms wish to invest in
the areas where demand exceeds supply. When screening the project ideas, the
project manager should consider factors like present domestic market demand,
expected future demand, number of competitors and their market shares and
entry barriers for the new entrants.
Check Your Progress

28. Which of the following aspects should the project manager consider to
eliminate ideas that are not promising?
i. Reasonability of costs
ii. Compatibility with promoter
iii. Availability of inputs
iv. Adequate market demand
29. Identify the activity or technique that is not a part of the formal screening
process.
a. Checklist
b. Black box
c. Rating system
d. Economic analysis
48
30. Initial screening is a process of rejection rather than a process of selection.

What are the types of project ideas rejected in the initial screening process?
a. Ideas that have limited commercial potential
b. Ideas that do not match with the firm’s objective
c. Ideas which are less risky
d. Both (a) and (b)
31. Acceptable risk level is a factor considered during the
a. initial screening stage.
b. market and technical analysis stage.
c. financial analysis stage.
d. project idea generation stage.
32. __________ occurs when the project manager permits a poor idea to move
into the development and commercialization phase.
a. Stand alone risk
b. Drop error
c. Systematic risk
d. Go error
33. Identify the factors that should be considered by the project manager to
check the acceptable risk level of a project.
i. Project’s vulnerability to social and environmental conditions
ii. Sustainability over long periods
iii. Government policies and controls
iv. Expected cash inflows
34. Which of the following statements is true regarding a drop error?
a. A drop error occurs when a company rejects a good idea.
b. A drop error occurs when the project manager permits a poor idea to
move into the development phase.
c. The project manager can avoid a drop error by reviewing ideas that
have been rejected.
d. Both (a) and (c)
2.8 Project Rating Index

The Project Rating Index is an evaluation method that helps management to
streamline the process of initial screening. In this method, the management
identifies factors for rating projects and assigns a weight to each factor. The
49
projects are then measured against these factors and assigned a score. This
method is useful for the firms when a large number of project ideas have to be
evaluated.
The steps involved in developing a project-rating index are described below.
1. Identify the relevant factors useful for rating a project.
2. Assign factor weights to each factor, based on the relative importance of
each factor.
3. Use an appropriate rating scale (5-point or 7-point) and rate the project on
the listed factors.
4. Multiply the factor rating with the factor weight to calculate the factor score
for each factor.
5. Add all the factor scores to determine the ‘rating index’ of the project
6. Reject the project if the rating index of the project is less than the desired
value.
Activity: The management of Zenix Turbo Machines Limited wanted to
screen the project ideas generated by its employees. The CEO of the company
wanted to use the project index method for screening the project ideas. The
job of screening was entrusted to one of the senior managers of the company,
Kamal Nath. The management of the company identified the following
factors in rating a project – input availability, complementary relationship
with other products of the firm, adequacy of market demand, technical know-
how, and consistency with government priorities. The factor weights assigned
to these factors were 0.2, 0.15, 0.3, 0.1, 0.15, and 0.1 respectively. The
management decided to reject a project idea, if its project rating index was
less than 3, and consider an idea, if its project rating index is more than 3.
Nath’s factor ratings for a project idea were 3, 2, 1, 2, 4 and 3 respectively.
Do you think, the management of the firm will consider this project for final
selection?
Answer:
2.9 Sources of Positive Net Present Value

Project managers, obviously prefer to select project ideas that give higher returns
than the investment made. Consequently, they consider the Net Present Value
(NPV) while screening the project ideas. The net present value is defined as the
present value of the future revenues minus future costs. Some of the factors that
firms can use to enhance the net present value of a project are – government
policy, economies of scale, product differentiation and superiority of technology.
50
2.9.1 Government Policy

The government imposes entry barriers to firms that import goods as part of its
social obligation. It uses import restrictions, restrictive licensing, high tariffs,
and environmental control to safeguard the interests of some specific industries.
If a project idea seems to be financially profitable, the project manager must
ensure that the project is not against the interests of the government. The project
manager should choose those projects which can receive special tax benefits and
exemptions. This results in positive net present value of the project.
2.9.2 Economies of Scale

A company is said to have actual economies of scale when it has reduced the
cost per unit produced through an increase in the scale of production, marketing
or distribution. The project managers should identify those ideas that will enable
him to achieve the benefit of economies of scale. But a considerable amount of
capital is required to achieve economies of scale. So it is the responsibility of the
project manager to screen the project ideas by analyzing the capital requirements
of the project. The project managers can also consider the possibility of mass
production. This is particularly relevant in the industries like petroleum refining,
mineral extraction, and aluminum, steel and iron production.
2.9.3 Product Differentiation

A company can create entry barriers for other companies by differentiating its
products from those of its competitors. Project managers try to select those ideas,
which recommend the development of products or services that are quite
different from those offered by its competitors. The factors that create
differentiation are innovative product features, high quality products and
customized service. Effective advertising and superior marketing yield better
results when the product is truly differentiable.
2.9.4 Superiority of Technology

New technologies can create new markets. Firms that have developed new
technologies will have an edge over their competitors. Firms like Xerox and
Microsoft earned superior returns for longer periods because of their
technological capabilities. Several Indian companies like Kinetic and Dr.
Reddy’s Labs outperformed their competitors because of their emphasis on
technology.
Check Your Progress

35. The factor score of a particular factor in calculating the project rating index is:
a. a sum of factor weight and factor rating.
b. a product of factor weight and factor rating.
c. a division of project rating index by the factor rating.
d. a product of factor weight and rating index.
51
36. Arrange the following options based on the sequence in which the project
manager develops a project rating index.
i. Multiply the factor rating with the factor weight to calculate the factor
score for each factor.
ii. Assign factor weights to each factor, based on the relative importance
of each factor.
iii. Identify the relevant factors useful for rating a project.
iv. Add all the factor scores to determine the ‘rating index’ of the project.
v. Use an appropriate rating scale and rate the project on the listed factors.
vi. Reject the project if the rating index of the project is less than the
desired value.
a. iii-ii-v-i-iv-vi
b. iii-v-ii-iv-vi-i
c. iii-iv-vi-v-i-ii
d. iii-i-ii-v-iv-vi
37. ___________ is an evaluation method that helps the management to
streamline the process of initial screening.
a. Spectrum analysis
b. Project rating index
c. Delphi technique
d. Attribute listing
38. Identify the factors that firms can use to enhance the Net Present Value
(NPV) of a project.
i. Favorable government policy
ii. Economies of scale
iii. Product differentiation
iv. Superiority of technology
Exercises
(Questions A – D)
Surjeet Technologies is planning to set up a plant in one of three locations –
Bangalore, Chennai, or Hyderabad. Following are the details of the factors
considered by the company for selecting the plant location, the weights attached
to each of them, and the rating for various factors on a scale of 1 to 5.
52
Factors Hyderabad Chennai Bangalore

Rating Rating Rating
Weights Scale Weights Scale Weights Scale
(1 to 5) (1 to 5) (1 to 5)
Closeness to 0.30 5 0.35 4 0.20 4
Market
Technology 0.15 3 0.15 5 0.25 5
Cost of 0.15 4 0.15 2 0.15 2
inputs
Government 0.15 3 0.10 3 0.20 3
regulations
Availability 0.25 4 0.25 4 0.20 4
of inputs
Based on the given data, answer the following questions.

A. Calculate the rating index for Hyderabad.
B. Calculate the rating index for Chennai.
C. Calculate the rating index for Bangalore.
D. The company wants to go ahead with a location that gives a rating index of
more than 4. Which of the locations would it select?
2.10 Summary
 When developing a new project, the project manager generates several ideas
from different sources like customers, employees and competitors, and finally
selects those project ideas that can be implemented.
 The generation of ideas requires creativity, sensitivity to the changes in external
environment, and assessment of firm’s capabilities for any individual.
 Creativity refers to the ability of an individual or a group to develop something
new. It involves the ability to combine or synthesize the available information
and experience to see new patterns and possibilities.
 The process of creativity involves four stages – preparation, incubation,
illumination and verification.
 Methods like attribute listing, checklist and black box help in improving the
creativity of an individual.
 Organizations encourage group creativity to elicit more and better ideas. Some
of the popular group creativity techniques used by organizations are
brainstorming, Delphi technique, and nominal group technique.
 Most firms conduct a SWOT analysis to identify their strengths and weaknesses,
and the opportunities and threats in the business environment.
53
 For the purpose of scanning the environment, the whole business environment
may be divided into six broad sectors: economic sector, governmental sector,
technological sector, socio-demographic sector, competition sector and supplier
sector.
 Before accepting a project, a firm must conduct a corporate appraisal. A realistic
appraisal of corporate strengths and weaknesses provides for exploiting the
opportunities in the environment.
 Project managers carry out various activities to generate more and more project
ideas. These include – study the existing industries, observe the inputs and
outputs of various industries, analysis of imports and exports, study of economic
and social trends, observe new technologies, identifying psychological needs
and study the government guidelines and recommendations for financial
institutions.
 After a pool of ideas has been generated, the project manager must screen them.
In this phase, the ideas that have limited commercial potential or do not match
the firm’s objective are rejected. Initial screening is a process of rejection rather
than a process of selection.
 The project rating index is an evaluation method that helps management to
projects are then measured against these factors and assigned a score.
 Project managers select project ideas that give higher returns than the
investment made. They consider the net present value while screening the
project ideas. The net present value is defined as the present value of the future
revenues minus future costs.
 Some of the factors that firms can use to enhance the net present value of a
project are – government policy, economies of scale, product differentiation and
superiority of technology.
2.11 Glossary
 Creativity: The ability of an individual or a group to develop something new. It
involves the ability to combine or synthesize the available information and
experience to see new patterns and possibilities.
 Net Present Value: The present value of the future revenues minus future costs.
 Project Rating Index: An evaluation method that helps management to
streamline the process of initial screening.

1. A project manager should always be on the look out for new ideas. Explain
the need for generating project ideas.
2. ‘Generation of ideas requires creativity, sensitivity to the changes in external
environment, and assessment of firm’s capabilities for any individual.’ Do
you agree with this statement? Why or why not?
54
3. For the purpose of scanning the environment, the entire business

environment may be divided broadly into six sectors, namely, economic
sector, governmental sector, technological sector, socio-demographic sector,
competition sector, and supplier sector. Explain the importance of scanning
these sectors in detail.
4. Project managers perform numerous activities to generate more and more
project ideas. What are these activities? Describe them in detail.
5. After the idea generation process, the project manager must screen them.
Explain the initial screening process. What are the aspects that are
considered by the project manager to eliminate ideas that are not promising?
How is the project rating index method used by the project manager to
screen the project ideas?
6. A project manager selects ideas that give greater returns than the investment
made. How can a project manager find out whether a project idea gives
greater returns or not?


unit.
New project ideas can come from different sources like customers,
competitors and employees. The project manager has to ensure that the
chosen idea for a new or modified product or a service can really cater to a
present unmet need.
2. (c) Net Present Value
Net Present Value (NPV) is used to conduct a financial analysis of projects.
In the case of financial projects, those with higher NPV are selected. Break-
even analysis is a technique used by the project manager to determine when
the project will arrive at a ‘no profit-no loss’ situation. Attribute listing is a
technique used to enhance creativity in individuals. The Program Evaluation
and Review Technique is a technique used to prepare a plan for
implementation of the project.
55
3. (b) drop the unviable ideas at the initial stages of new project
development.
After the ideas have been collected, the project manager has to screen them.
The objective of screening is to drop the unviable ideas at the initial stages
of new project development. It is a process of rejection rather than one of
selection. Screening helps in rejecting ideas that cannot be considered for
implementation.
The project manager uses different sources like customers, employees, and
competitors to generate ideas and finally selects those project ideas that can be
implemented. The generation of ideas requires creativity, sensitivity to changes
in the external environment, and assessment of the firm’s capabilities by any
individual.
5. (c) Only ii
Net Present Value is used to screen project ideas. In the case of financial
projects, the projects with higher positive NPV are selected.
6. (b) Brainstorming
Attribute listing, checklist, and black box are techniques that organizations
use for developing creativity in an individual. Brainstorming is a technique
used to improve creativity in groups.
7. (b) Preparation – Incubation – Illumination – Verification.
illumination, and verification. In the preparation stage, an individual gathers
the necessary information, defines the problem precisely, analyzes the data,
and generates a number of alternatives. In the incubation stage, he/she
comes out with unusual alternatives because of subconscious mental activity
coupled with divergent thinking. In the illumination stage, the individual
gets an insight into a problem all of a sudden while he/she is thinking of
several alternatives. In the verification stage, the feasibility of the alternative
ideas is examined.
8. (c) Creativity
Creativity refers to the ability of an individual or a group to develop
something new. It involves the ability to combine or synthesize available
9. (c) Nominal group technique
The nominal group technique is a structured technique administered by a
coordinator. All the individual members prepare their ideas independently.
They are then requested to present the ideas before the other members, who
rate the ideas. The coordinator notes down all the ideas generated (positive
and negative arguments of each idea) for future use.
56
10. (b) Preparation

illumination, and verification. In the preparation stage, an individual gathers
the necessary information, defines the problem precisely, analyzes the data,
and generates a number of alternatives.
11. (c) Brainstorming encourages group members to generate as many
ideas as possible, helps in improving ideas of other members, and allows
synthesizing of two or more ideas.
The brainstorming technique encourages group members to generate as
many ideas as possible. Improving the ideas of other members and
synthesizing two or more ideas is allowed, but criticism of any idea is not
entertained.
12. (c) Only ii and iii

Verification is the last and final stage of the creativity process. In this stage,
the feasibility of alternative ideas is examined. The ideas for which solutions
are not feasible are rejected.
13. (c) Nominal group technique

The nominal group technique is a structured technique administered by a
coordinator. All the individual members prepare their ideas independently.
They are then requested to present the ideas before other members, who rate
the ideas. The coordinator notes down all the ideas generated (positive and
negative arguments of each idea) for future use.
14. (c) Illumination

illumination, and verification. In the illumination stage, an individual gets an
insight into a problem all of a sudden while he/she is thinking about several
alternatives. The practicability of this idea is then examined.
15. (b) the individual comes out with unusual alternatives because of
subconscious mental activity coupled with divergent thinking.
In the incubation stage, an individual comes out with unusual alternatives
because of subconscious mental activity coupled with divergent thinking. In
this stage, an individual does not consciously focus on the problem, but
allows the subconscious mind to look for a solution.
16. (c) Black box
The popular group creativity techniques that organizations use are
brainstorming, the Delphi technique, and the nominal group technique.
Black box is a technique that organizations use for developing individual
creativity.
57
17. (a) Only i, ii, and iii

Creativity refers to the ability of an individual or a group to develop
something new. It involves the ability to combine or synthesize the available
information and experience to see new patterns and possibilities. Creativity
is best nurtured in a liberal climate where everybody is encouraged to
develop new ideas and new ways of doing things. However, very few
organizations are able to create such a climate. Creativity can be nurtured
both at the individual as well as group levels.
18. (d) Both (a) and (c)
Attribute listing is a technique used to improve creativity in individuals. In
this technique, attributes that can be attached to the end product and/or
service are listed. Based on the listed attributes, the final product is
designed.
19. (d) Checklist
A checklist consists of a set of questions that are relevant to a given
situation. Answering these questions can help the individual find a solution
to the problem. In the attribute listing technique, attributes that can be
attached to the end product or service are listed. In the black box technique,
all the required and available inputs as well as the desired outputs are listed.
The Delphi technique is a structured approach to elicit the ideas and
opinions of a number of experts.
20. (d) Delphi technique
Delphi technique is a structured approach for eliciting the ideas and opinions
of a number of experts. A panel of experts is asked to generate ideas at the
individual level, for a given issue.
21. (b) Black box
In the black box technique, all the required and available inputs as well as
the desired outputs are listed. It is also checked whether these outputs can be
produced using the available inputs.
The various activities to be carried out while searching for new project ideas
are – studying the existing industries, observing the inputs and outputs of
various industries, analyzing imports and exports, studying economic and
social trends, observing new technologies, identifying psychological needs,
and studying the government guidelines and recommendations for financial
institutions.
23. (b) Economic sector
The economic sector comprises macro level factors like the state of the
economy, the overall rate of economic growth; the growth rate of the
primary, secondary, and tertiary sectors; the BoP (Balance of Payments)
58
position; and the trade deficit/surplus of the country. The project manager
should also analyze the economic environment to assess the viability of new
project ideas.
24. (b) before a project is accepted.
Before accepting a project, a firm must conduct a corporate appraisal. A
realistic appraisal of corporate strengths and weaknesses helps in exploiting
the opportunities in the environment.
25. (b) i-iii-ii
Spectrum analysis enables the project manager to identify the gaps between
the consumers’ psychological needs and the needs that existing products
meet. In spectrum analysis, the important factors influencing customers’
brand preferences are identified and the existing brands in the market are
then placed on a continuum in respect of the factors identified by the
customers. The project managers then attempt to identify the gaps relative to
the listed psychological needs.
26. (c) Socio-demographic sector
A study of the socio-demographic sector involves the study of population
growth, age shifts in population, educational profile of the people, gender
composition, and religious interests. The project manager should understand
all the socio-demographic aspects while setting the objectives of the project
and in preparing the relevant procedures.
27. (c) Spectrum analysis
Spectrum analysis enables the project manager to identify the gaps between
the consumers’ psychological needs and the needs that existing products
meet. In spectrum analysis, the important factors influencing customers’
brand preferences are identified and then the existing brands in the market
are placed on a continuum in respect of the factors identified by the
customers. The project managers then attempt to identify the gaps relative to
the listed psychological needs.
The project manager must consider the following aspects to eliminate ideas
that are not promising – acceptable risk level, reasonability of costs,
compatibility with promoter, consistency with government priorities,
availability of inputs, and adequate market demand. The project idea should
be compatible with the interests and abilities of the person who is promoting
the project. The promoter provides the basic resources to the project.
Therefore, the project manager should ensure that the project is acceptable
to him/her. The project ideas should be carefully screened keeping in view
the government priorities. Sometimes, a project may be scrapped before
completion due to its harmful effects on society. The project manager
should therefore be familiar with all the rules and regulations framed by the
government.
59
29. (b) Black box

Ideas can be screened in a variety of ways. Some managers use an informal
screening process to eliminate unsuitable ideas. A formal screening process
involves a checklist, a rating system, and an economic analysis. Black box
is a technique used to enhance creativity in individuals. In this technique,
all the required and available inputs as well as the desired outputs are listed.
It is also checked whether these outputs can be produced using the
available inputs.
30. (d) Both (a) and (b)

In the initial screening phase, ideas that have limited commercial potential
or do not match the firm’s objective are rejected. Initial screening is a
process of rejection rather than a process of selection. The objective is to
reject those ideas that cannot be considered for implementation. A project
manager usually implements more profitable and risk-free activities so that
the probability for success of a project increases.
31. (a) initial screening stage.
Assessment of the risk level associated with a selected idea is a factor
considered during the initial screening stage. In the project idea generation
stage, the project manager uses several techniques like attribute listing,
checklist, brainstorming, etc., to generate new project ideas. In the market
and technical analysis stage, the market and technical feasibility of the
project idea is determined. Market analysis estimates the size of the
potential market, patterns of consumption, level of competition, and market
composition. Technical analysis includes the study of all the relevant design
and engineering aspects, reliability, and sustainability of the product. The
financial feasibility of the project idea is determined in the financial analysis
stage of the project idea. In this stage, the project manager examines the
capital costs and operating costs and revenues of the proposed project.
32. (d) Go error

When screening ideas, the project manager must avoid two types of errors –
drop error and go error. A go error occurs when the project manager permits
a poor idea to move into the development and commercialization phase.
Since costs rise substantially with each successive development stage, poor
ideas have to be dropped as early as possible.
33. (d) i, ii, iii and iv

Assessment of the risk level associated with a selected idea is a factor
considered during the initial screening stage. The project manager has to
consider factors like the project’s vulnerability to social and environmental
conditions, sustainability over long periods, government policies and
controls, and expected cash inflows.
60

When screening ideas, the project manager must avoid two types of errors –
drop error and go error. A drop error occurs when a company rejects a good
idea. The project manager should review ideas that have been rejected to
avoid a drop error. If a project manager makes too many drop errors, it
shows that he/she is too conservative.
35. (b) a product of factor weight and factor rating.
The project rating index is an evaluation method that helps the management to
projects are then measured against these factors and assigned a score. The factor
score for each factor is calculated by multiplying the factor rating with the factor
weight.
36. (a) iii-ii-v-i-iv-vi
The project rating index is an evaluation method that helps the management
to streamline the process of initial screening. The steps involved in
developing a project-rating index are – identify the relevant factors useful
for rating a project; assign factor weights to each factor based on the relative
importance of each factor; use an appropriate rating scale (5-point or 7-
point) and rate the project on the listed factors; multiply the factor rating
with the factor weight to calculate the factor score for each factor; add all
the factor scores to determine the ‘rating index’ of the project; reject the
project if the rating index of the project is less than the desired value.
37. (b) Project rating index
The project rating index is an evaluation method that helps the management to
projects are then measured against these factors and assigned a score. This
method is useful for firms when a large number of project ideas have to be
evaluated.

NPV is defined as the present value of the future revenues minus future costs.
Some of the factors that firms can use to enhance the net present value of a
project are: favorable government policy, economies of scale, product
differentiation, and superiority of technology. Favorable government policies
will have a positive affect on the business of the organization. Economies of
scale will reduce the costs of the organization, thus adding to its revenues.
Product differentiation and use of superior technology will help the company
in bringing out products that are much superior to those of its competitors.
This will in turn add to the revenues of the organization. All these factors will
enhance the NPV of a project.
61

Following are the answers to the Exercises given in the unit.
A. 4
Hyderabad:
Factors Weights Rating Scale Factor score

(1 to 5)
Closeness to Market 0.30 5 1.5
Technology 0.15 3 0.45
Cost of inputs 0.15 4 0.60
Government 0.15 3 0.45
regulations
Availability of inputs 0.25 4 1.00
Rating Index 4.00
B. 3.75
Chennai:

(1 to 5)
regulations
Rating Index 3.75
C. 3.75
Bangalore:

(1 to 5)
regulations
Rating Index 3.75
62
D. None of the three

In the project rating index method, a project is rejected if the rating index is
less than the desired value. Here, the company wants to select a location that
has a rating index of more than 4. Hyderabad has a rating index of 4, and
Chennai and Bangalore have a rating index of 3.75. Therefore, the company
will not select any of the three locations.
63
Unit 3
Market and Technical Analysis of Projects
Structure
3.1 Introduction
3.2 Objectives
3.3 Market and demand analysis
3.4 Technical Analysis
3.5 Summary
3.6 Glossary
3.7 Self-Assessment Test
3.8 Suggested Readings/Reference Material
3.1 Introduction
In the previous unit, we have discussed project idea generation and screening. In
this unit, we will discuss market and technical analysis of projects. Once the
project ideas are generated and screened, they are evaluated to test their
marketability, technical feasibility, and cost considerations. Market and demand
analysis provides a detailed analysis of all market conditions and technical
analysis provides an assessment of all technical aspects of the project idea. The
market analysis estimates the size of the potential market, patterns of
consumption, level of competition, market composition and demand analysis
determines the aggregated demand for a product or service for a particular
period, variations in supply, hidden demands of the customers, etc. Technical
analysis of a project idea includes the study of all the relevant design and
engineering aspects, reliability and sustainability of the product. An in depth
study of market and demand analysis followed by technical analysis reveals the
probability of success of a project idea.
This unit will deal with market and technical analysis of projects. We shall first
discuss market analysis of projects that involves aspects like situational analysis
and objectives specification, collection of data, market survey, market
description, demand forecasting, uncertainties in demand forecasting and market
planning. We shall then move on to discuss technical analysis of projects that
involves aspects like technology selection, input requirements and utilities,
product mix, plant capacity and functional layout, location of the project,
machinery and equipment, and consideration of alternatives.
3.2 Objectives
 explain how to conduct market and demand analysis of a project.

 analyze the technical aspects of a project.
3.3 Market and demand analysis
A project manager should carefully study the market potential for a given project
idea. Conducting market surveys, collecting primary and secondary data,
studying the characteristics of the market are some of the activities to test the
market environment and see if the idea is feasible. Demand analysis of a product
includes the study of consumption patterns, income and price elasticity of
demand, nature of competition, availability and prices of substitutes and
complementary products. The activities of a project manager in conducting a
market and demand analysis include situational analysis and objectives
specification, collection of secondary data, market survey, market description,
demand forecasting, and market planning.
3.3.1 Situational Analysis and Objectives Specification
Situational analysis is the process by which a project manager studies customer

preferences and their purchasing capacity and strategies of the competing firms
and intermediaries. In the process, the project manager interacts with the project
stakeholders such as clients, channel members, employees and competitors of
the firm to better understand market requirements.
A project manager need not go in for a formal study when he is satisfied with the
information generated through informal talks and feels that it is adequate to scale
the present and future demand for a product. But if there is a need for a formal
study, the project manager has to define the objectives of the study. Once the
objectives are clearly stated, the questions in the survey should be framed in
such a way so as to elicit the required response (answer relating to market
demand, expected revenue etc).
Suppose a small firm has developed an inverter that is technically competitive to

cater to the customers whenever there is a power cut. The management of the
firm should answer the following questions to check whether the objectives of
the firm are in tune with market interests:
 Who are the customers of inverters?

 What is the existing demand for inverters? (specify country wise, state wise
demand)
 How is the pattern of demand over the year?
 What are the areas with higher demand for power? (specify the hours of demand
area wise)
65
 What are the prices and features of inverters being offered by the competitors?
 How sensitive are customers to the price of an inverter?
 How many types of distribution channels are available for inverters in the
market?
 What are the constraints faced by intermediaries to capture the market?
 How can existing customers be convinced to use the newly developed product?
 What price and warranty will ensure the product’s acceptance in the market?
3.3.2 Collection of Data

The project manager collects a lot of data from all the possible sources to answer
the questions listed above. Broadly, data is of two types: primary data and
secondary data.
Primary data is the data that is collected for a specific purpose and for the first
time. Secondary data is the data that is already available but might have been
collected for some other purpose or by some other institutions. Secondary data is
considered to be more useful in market analysis as it is easy to obtain and is also
economical.
Primary data can be obtained from sources both internal and external to the
organization. Internal primary data is obtained from past and current sales of the
firm, observations of employees of the firm etc.
External primary data is obtained from the opinion of the dealers, feedback of
the sales personnel and sales trends. Survey methods or experimental methods
are ideal for gathering primary data.
The survey method of data collection includes personal interviews, telephonic

interviews and mail surveys with customers or middlemen. The experimental
method includes product testing, psychological techniques and consumer panel
techniques. Product testing is an objective appraisal of the product performance
done on a limited scale without using the firm's brand name. In psychological
techniques, a researcher who is trained in psychology, tests the subconscious
emotions of customers.
Another technique called 'consumer panel technique', is done by selecting a

group of customers (on a permanent basis ) and interviewing the group at
different intervals of time to observe their behavioral changes.
This enables the project manager to understand market trends and changing
preferences of customers. The primary data provides problem specific and
accurate information, but collection of primary data requires more time and it
also incurs more costs.
Project managers prefer to use secondary data as it is readily available and

economical. The secondary data are compiled by the government, non-profit
organizations, or some social welfare institutions. Professional market research
66
agencies like Market Analysis and Research Group (MARG), publications of

Center for Monitoring Indian Economy (CMIE), Journals of Federation of Indian
Chambers of Commerce and Industry (FICCI), annual reports of Central
Statistical Organization (CSO), Census of India, various research theses
available in the universities and research organizations are some sources of the
secondary data.
A project manager should carefully select the sources of secondary data as the
data was collected by other organizations for their own needs. He should also
ensure that the sources are authentic and the information is accurate, reliable,
relevant and economical to obtain. Since the data is not collected for a specific
problem, the project manager has to correlate the available information with the
existing problem.
Check Your Progress

1. The size of the potential market, the level of competition, etc., are estimated
by conducting a ____________.
a. market analysis
b. technical analysis
c. financial analysis
d. demand analysis
2. Variations in supply are determined by ____________.
a. technical analysis
b. financial analysis
c. market analysis
d. demand analysis
3. Which of the following activities are conducted to test the market
environment and see whether the project idea is feasible or not?
i. Market surveys
ii. Colleting primary and secondary data
iii. Studying the characteristics of the market
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
4. Identify the activities that the project manager uses to conduct a market and
demand analysis.
i. Situational analysis
ii. Market description
iii. Objectives specification
iv. Demand forecasting
67

5. Which of the following statements is false regarding primary data and
secondary data?
a. Primary data is the data that is collected for a specific purpose and for
the first time.
b. Secondary data is data that is already available but might have been
collected for some other purpose.
c. Primary data can be obtained only from sources internal to the
organization.
d. Secondary data is readily available and economical to use.
6. Identify the statement(s) that does/do not hold true regarding secondary
data.
a. Secondary data is considered to be more useful than primary data in
market analysis as it is easy to obtain and is also economical.
b. Secondary data provides problem specific information.
c. Secondary data is readily available and requires less time to collect than
primary data.
d. Both (b) and (c)
7. Which of the following is not an experimental method of data collection?
a. Product testing
b. Personal interviews
c. Consumer panel techniques
d. Psychological techniques
8. In psychological technique,
a. a researcher tests the subconscious emotions of customers.
b. a group of customers, selected on a permanent basis, are interviewed at
different intervals of time to observe their behavioral changes.
c. information about the changing preferences of customers is collected by
sending mails to them.
d. an objective appraisal of product performance is done on a limited scale
without using the firm’s brand name.
9. Identify the technique in which a group of customers are selected on a
permanent basis and interviewed at different intervals of time to observe
their behavioral changes.
a. Product testing
b. Consumer panel technique
c. Personal interviews
d. Psychological techniques
68
3.3.3 Market Survey

Sometimes information collected from secondary sources may not be enough to
understand the market conditions completely. Hence, information obtained from
secondary sources should be supplemented by primary data, which is problem-
specific. A market survey is a useful method of obtaining the primary data.
Market survey is a technique that is aimed at gathering all possible information
by conducting interviews. The project manager chooses a convenient sample, as
it is not possible to study the entire population in the market. He conducts
personal interviews with stakeholders of the project either directly or by phone
to gather the information. Opinion surveys, attitude surveys, information
surveys, future invention surveys help the project manager to understand what
the customers wants.
The project manager considers the entire market population for the projects like
manufacturing intermediate goods and investment goods, where the project
customers (clients) are limited in number. These surveys are called census
surveys. The results obtained from this survey are more reliable than the sample
survey, but conducting the survey is more expensive.
A market survey is useful in determining the total market demand, demand
growth rate in different segments of the market, understanding the inner motives
of the customer and measuring the unsatisfied needs of the customers. Since it is
not possible to interview the entire population of the market, sample survey is a
good method to assess the market characteristics. The project manager conducts
the sample survey by choosing a sample that best represents the characteristics of
the population. A small sample is more convenient and economical as well. The
following are the steps in a sample survey:
Defining the Target Market

The project manager defines the target market of a project idea in terms of
market population. He then divides the population into the various segments
based on the buyer characteristics. For example, the various segments of
customers for a power project are household consumers, commercial consumers,
industries, and all state/central government offices.
Selecting the Sample

The project manager carefully selects a sample that represents all the
characteristics of the population from various segments. The sample should not
be very small as it cannot represent the characteristics of the population. In the
same way, the sample should not be large, as it is not economical for the firm
conducting the survey.
Developing the Questionnaire

A questionnaire is a formalized set of questions for generating information. The
questions can be structured or unstructured or a combination of both, depending
on the requirement. Structured questions are questions followed by a fixed
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number of choices from which the respondent should choose an answer.

Unstructured questions require the respondent to give descriptive answers.
However, it is tedious to analyze an unstructured questionnaire.
The questions in a questionnaire can be classified into three types based on the
content: administrative questions, classification questions and target questions.
Administrative questions include respondent identification, interviewer
identification, date and place of interview etc. Classification questions are about
the respondent’s characteristics, socio-demographic and behavioral information.
These provide information on sex, age, family size, household income, social
class, education and attitudes. The target questions are about the present project
and its products. Questions should carefully be sequenced so as to be understood
by all segments of target customers. An understanding of end product or service
of the project, its usage and a knowledge of human psychology are essential in
developing the questionnaire.
Training the Surveyors

The management has to be diligent while recruiting the market surveyors who
actually conduct the survey. As survey methods are mostly personal, the project
manager should ensure that these surveyors are able to tap the hidden interests of
the customers. Proper training of the surveyors will ensure good results.
Recording the Information
The information obtained from the survey should be recorded for future use.
This is done by thoroughly scrutinizing the obtained information to avoid
inconsistent and unreliable data. Project manager does editing and tabulating of
the information before recording the information. The recorded information is
used whenever required.
Interpreting the Information
The recorded data is interpreted by analyzing it by using some standard
statistical techniques such as Chi-Square test, correlation, regression, ANOVA
analysis etc.
3.3.4 Market Description
Based on the information obtained from the secondary data sources and market
survey, the project manager describes the marketability of the project idea in
terms of its effective demand, breakdown of demand, price, consumers' interests,
method of distribution, types of sales promotion, supply and competition, impact
of government policies, etc.
Effective Demand
In a perfect market, effective demand for a particular product or service is
nothing but apparent consumption. Apparent consumption is calculated as the
sum of production and trade surplus/deficit minus changes in stock level.
Because of limitations like exchange restrictions and government controls over
production and distribution, the effective demand is less than apparent
consumption. Apparent consumption takes into account only the desirability and
70
ability of the buyers. But effective demand also considers willingness of the
buyers. The project manager analyzes the present and past effective demand for
the product or service.
Breakdown of demand
The project manager can better determine the total demand of the product by
dividing it into various segments as per nature of the product, type of customers,
or by geographical location. For example, the total demand for steel is sum of
the demand of all products that are made of steel. In case of power projects, the
total demand can be divided into domestic consumers demand and industrial
consumers demand. The demand as per geographical location would be demand
in rural and urban areas.
Price
The project manager collects the price statistics of the proposed project idea to
understand the market fluctuations and the changes of price of the product. This
allows him to arrive at the best price for his product. The project manager can
also explore the possibilities of keeping the price high by maintaining high
quality or he can look for ways to reduce project costs and keep the prices low.
Consumers Interest
The project idea is evaluated on the basis of the consumers' demographical,
sociological, cultural interests and values. A project idea that goes against these
interests and values should not be taken up. The project manager has to observe
different purchasing motives of the different consumer groups for a specific project
idea.
Methods of Distribution
The 'reach' of a product or service plays an important role in determining the
success of the product. As different products require different 'reach', project
ideas should be evaluated by its reach. Depending on the nature of the product
(consumer/industrial product), the project manager selects the method of
distribution and plans the promotional practices to generate more sales.
Sales Promotion
The project manager adopts different techniques of sales promotion after
considering the characteristics of the market, nature of product and the
distribution channel. Discounts, free gifts, coupons are some of the sales
promotion techniques used to increase sales of the product.
Supply and Competition
To survive competition, a project manager analyzes the 'supply and demand
situation' for all project ideas. Any product or service that has demand exceeding
supply is worth taking up. A project manager also considers the supply of
complementary and substitute products while studying the market competition.
71
Government Policy
The government provides incentives to certain industries for the benefit of the
country through its five-year plans, export incentives, preferential purchases and
subsidies. Therefore, the project manager has to understand government interests
to evaluate the project idea better. If the government provides certain incentives
to a particular industry, then the prices of the product are lowered. This change
in the price in turn will affect the demand for the product.
Activity: Vihar Manufacturing Limited, established in 1995, manufactures a

variety of grinding, milling and lathe machines. In 1999, the company
planned to manufacture numerical and computer-numerically controlled
machines. Venkata Raman, the CEO of Vihar Manufacturing Limited, wanted
to estimate the market demand for these machines. He went through market
estimates prepared by the marketing team, based on the secondary data. The
CEO was skeptical about the use of secondary data. He asked for estimates
prepared on the basis of primary research. Why does Raman prefer primary
data? What type of sampling should the company use when conducting a
market survey for collecting the primary data?
Answer:
Check Your Progress

10. Arrange the following steps based on the sequence in which the sample
surveys are conducted.
i. Interpreting the information
ii. Developing the questionnaire
iii. Defining the target market
iv. Training the surveyors
v. Selecting the sample
vi. Recording the information
a. iii-ii-v-i-iv-vi
b. iii-v-ii-iv-vi-i
c. iii-iv-vi-v-i-ii
d. iii-i-ii-v-iv-vi
11. Target questions are
a. questions about age, family size, education, and attitudes of the
respondent.
b. questions about the respondent’s characteristics, socio-demographic
information, and behavioral information.
72
c. questions about the present project and its products.

d. questions about the respondent identification, interviewer identification,
and data and place of interview.
12. Apparent consumption is calculated as
a. Production + Trade Surplus/Deficit + Changes in Stock Level
b. Production + Trade Surplus/Deficit – Changes in Stock Level
c. Changes in Stock Level + Trade Surplus/Deficit – Production
d. Production – Trade Surplus/Deficit – Changes in Stock Level
13. Identify the aspects that apparent consumption does not take into account.
a. Desire of the buyers
b. Ability of the buyers
c. Willingness of the buyers
14. The total demand for the product can be determined by dividing the entire
market into various segments based on all except
a. the nature of the product.
b. the type of organizational structure.
c. the type of customers.
d. the geographical location.
3.3.5 Demand Forecasting

The project manager forecasts the demand for a particular product or service
using information obtained from secondary sources, market survey and market
description. Statistical techniques like trend projections are useful in forecasting
the demand for a particular product. These methods extrapolate past trends into
the future to forecast future demand, revenues or sales.
Apart from statistical methods, the project manager forecasts future demand
using techniques like chain ratio technique, consumption level technique, end
use technique, leading indicator technique and econometric technique. These
techniques study the cause and effect relationship of several variables on demand
of the product.
Chain Ratio Technique

This is a simple technique that applies a series of factors to forecast the demand
for a particular product or service. For example, a firm manufactures office bags
for men. The firm estimates the aggregate demand of the office bags for men in
the following manner by using the chain ratio technique.
 Population of males in the country: 55 million

 Proportion of educated males in the population: 0.68
 So, population of educated males : 37.4 million
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 Proportion of employees in the educated males : 0.42

 Population of male employees: 15.7 million
 Proportion of male employees who will purchase an office bag : 0.61
 So, potential sales of office bags : 9.58 million
The method seems simple to use, but the applicability of this method mainly
depends on the accuracy of the ratios used. Project manager should carefully
estimate these ratios to estimate demand for a particular product or service.
Consumption Level Technique
The consumption level technique estimates the demand for a particular product
or service on the basis of income and price elasticities of demand.
3.3.6 Income elasticity of demand
Income elasticity represents the effect of the change in the demand as a

proportion to change in the income. It is calculated as:
Q 2  Q1 I  I1
e   2
i I 2  I1 Q 2  Q1
e i = 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
The practical use of income elasticity of demand is explained below. Suppose

per capita annual demand for rice in the country is 70 kg. The elasticity of
demand for rice is 1.02. Assume the projected per capita annual income four
years hence is 12% more the present.
Then the projected demand for rice would be = (present per capita demand) (1+
per capita income level  income elasticity of demand)
= (70 kg) {1+ (0.12  1.02)} = 78.57kg per capita per annum.
3.3.7 Price elasticity of demand
The price elasticity of demand represents the effect of the change in the demand
as a proportion to change in the price. This is also calculated like income
elasticity of demand. Both these techniques are useful in estimating the
sensitivity of demand to changes in income and price levels.
74
End Use Technique
This technique is useful in estimating demand for intermediate products such as

investment goods and industrial tools. The project manager estimates the
consumption coefficient of the product for various uses for all users in the
country.
Leading Indicator Technique

The change in the value of a particular variable leads to a change in the value of
another variable. For example, a change in the level of literacy of a country leads
to a change in the demand for paper. From the above example, the variable,
literacy level is called a leading variable and the change in the demand for paper
is called a lagging variable. There are two steps involved in using this technique
-- identifying the appropriate leading indicators; and establishing a relationship
between the leading variables and lagging variables to find the demand. In
practice, identifying appropriate leading indicators is difficult and it cannot be
assumed that the relationship between leading and lagging variables remains
stable over a period of time.
Econometric Technique
This technique explains the behavior of the economic variables as per the
equations developed. The equation may be a single equation or multiple
equations. In a single equation model, the dependent variable is explained by
several other independent variables.
For example, the demand for rice is explained by the variation in population and
income as
Dt = a0 + a1 Pt +a2 It
where Dt = demand for rice in year 't'
Pt = population in year 't'
It = income in year 't'
a0, a1 and a2 are the constants.
Another model, called 'simultaneous equation model' explains the economic
relationships between different variables in terms of two or more equations.
For example, the demand for paper is explained by the number of newspapers
printed and the number of computers. Again, the variable, number of newspapers
is explained by increase in population and the number of computers is explained
by income levels.
Pt = a0 + a1 Nt + a2 Ct
Nt = a3 + a4 Pt
Ct = a5 + a6 It
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where, Pt = demand for paper in year t

Nt = rise in number of newspapers
Ct = rise in number of computers
It = income level
This technique is useful while understanding complex cause and effect
relationships and in judging the sensitivity of certain variables.
Example: IBM’s Structured Walk-Through Technique

The structured walk-through technique was developed by IBM in 1960 as a
relatively friendly approach in evaluating project ideas. Normally, all group
meetings do not come out with the best available ideas as most people
criticize the ideas. The structured walk-through approach deals with the
problem by giving control to people who are being evaluated over the process
of evaluation itself. Following are some rules that reflect the original IBM
rules:
Rule 1: The Group being evaluated chooses its Judge and Jury
The people who give their opinion on a particular project idea elect an
evaluation team. This is to assume that the judgment is genuine and it creates
a sense of trust, and the people freely deliver their own ideas.
Rule 2: The Group being evaluated determines the rules of the evaluation
effort
The people being evaluated also frame the rules of evaluation. They prepare
evaluation instructions to the members who are conducting the evaluation.
Rule 3: The Group being evaluated determines the rules of the evaluation
meetings
The people being evaluated decide how the meeting should be conducted.
They decide who is supposed to talk, when and how long.
Rule 4: No upper level managers should be present at the evaluation
sessions
As this process is aimed at creating an open environment for a free flow of
ideas, upper level managers normally do not attend the session.
Rule 5: Customers should not be present at the evaluation
This rule is not given by IBM. But experts recommend absence of customers,
as customers may criticize the idea or the people may hesitate to present their
ideas before the customers.
Rule 6: Documentation of the whole process
All proceedings of the session should be clearly documented for future
consideration.
Adapted from J. Davidson frame, 'The New Project Management,’ Jossey Bass Inc., p.
273-276.
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3.3.8 Uncertainties in Demand Forecasting

The statistical techniques and causal methods explained above are prone to
errors because of the many uncertainties involved. The major sources of
uncertainty are: techniques of forecasting, past and present market data, and
environmental change.
Techniques of Forecasting
Forecasts obtained by using statistical techniques are prone to errors as they take
into account only quantitative factors and ignore qualitative factors. Also, as
some factors are non-quantifiable, the outcome of these techniques is not
accurate. Similarly, certain unrealistic assumptions may lead to the change in the
estimates of future demand. For example, the consumption coefficients used in
end-use method may be unrealistic assumptions.
Past and Present Market Data
Past and present market data are very useful in forecasting the demand for a
product. But the data may not be completely reliable if some unusual events had
occurred at the time when the data was collected. Then, this data cannot be
considered for forecasting because of the influence of these unusual factors.
Environmental Changes
The changes in business environment like technological shifts, changes in the
government policy, discovery of new raw materials, international trade
developments, vagaries of monsoons influence projects in several ways. For
example, the arrival of VCD players in the market has affected the demand for
VCRs. A rise in the prices of petroleum products at the international level will
have an effect on the demand for automobiles.
3.3.9 Market Planning
The four Ps of marketing -- product, price, place, and promotion should be well
designed to achieve the expected level of market penetration. When dealing with
services, the market planning should also include the process, people, and
physical evidence. For example, planning a thermal power station project should
include determining its production capacity, likely cash inflows, place of
construction and transportation and sales programs. For service projects like
medical camps, the planning requires to find out the numbers of the people
involved, the structure and schedule of the project.
Activity: Prasad Engineering Services, using different forecasting techniques,

estimated that a new project would increase the company's revenues by 20%
after completion. But after the project was completed, it increased company
revenues by a mere 5%. The management of the company tried to understand
why the project did not generate the forecasted revenues. After much
discussion, the management concluded that the various uncertainties involved
in the process of demand forecasting had led to an over-estimation of market
demand. What uncertainties are normally involved in the process of demand
forecasting? How can a project manager cope with the uncertainties of
demand forecasting techniques?
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Answer:
Check Your Progress

15. The project manager forecasts the demand for a particular product or service
using information obtained from which of the following sources?
i. Secondary sources
ii. Market survey
iii. Market description
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
16. Which of the following techniques applies a series of factors to forecast the
demand for a particular product or service?
a. Leading indicator technique
b. Chain ratio technique
c. Econometric technique
d. End use technique
17. Identify the technique that makes use of income and price elasticities of
demand for estimating the demand for a particular product or a service.
a. End use technique
b. Econometric technique
c. Consumption level technique
d. Leading indicator technique
18. Income elasticity represents the effect of a change in the demand as a
proportion to a change in the income. Which of the following options give
the correct formula for calculating income elasticity?
Q 2 + Q1 I2 I1
a. ei = ×
I 2 + I1 Q2 Q1
Q2 Q1 I 2 + I1
b. ei = ×
I2 I1 Q 2 + Q1
78
Q2 Q1 I2 I1
c. ei = ×
Q1 Q 2 I1 I 2
Q2 Q1 I 2 I1
d. ei = ×
Q1 Q 2 I 2 + I1
19. Identify the technique which assumes that a change in the value of a
particular variable will lead to a change in the value of another variable.
a. Chain ratio technique
c. Leading indicator technique
d. End use technique
20. Which demand forecasting technique explains the behavior of the economic
variables as per the equations developed?
a. End use technique
c. Leading indicator technique
d. Chain ratio technique
21. Which of the following formulae will help in finding out the demand for
wheat in a particular year with variations in population (P) and income (I)?
a. a0Pt + a1It + a0a1
b. a0 + a1Pt + a2It
c. a1 + a2Pt + a3It
d. a1Pt + a2It + PtIt
22. Statistical techniques and causal methods are prone to errors because of the
many uncertainties involved in the process of forecasting demand. Which of
the following are the major sources of uncertainty?
i. Techniques of forecasting
ii. Past market data
iii. Present market data
iv. Environmental change
Exercises
A. The per capita annual demand for wheat in India is 100 kg. The elasticity of
demand for wheat is 1.05. Assume that the projected per capita annual
income is expected to increase by 15% in the next year. Calculate the
projected demand for wheat.
79
B. The current consumption of product P is 13 tons per year. If the income is

expected to increase by 7% next year and the demand for Product P is 15.5
tons, calculate the income elasticity of the product.
3.4 Technical Analysis
Technical analysis of a project idea includes an in depth study of all technical

aspects related to basic manufacturing operations, detailed design, assembling,
modeling and prototype testing. A competent team of technical experts or
reputed technical consultants evaluate the technical aspects of the project. A
project manager can also appraise the current project idea with reference to
similar technology already in use.
The project manager engages in detailed discussions with the technical crew to
ascertain the technical viability and feasibility of the proposed project idea.
Sometimes, technical analysis of a project idea includes technical testing of the
model in a simulated environment. For example, software modules are tested
internally on a limited scale to see if they meet the required standards. Similarly,
O-shaped rings are tested at very low temperatures to test the viability of its shape.
This is because metal contracts at low temperatures and the shape get distorted.
Technical evaluation of a project idea is a very crucial aspect and any wrong
decision at this stage will have far-reaching implications for the viability of a
project. This is because technical decisions are irreversible and they require high
investments. Determining technical parameters also decides the competitiveness
of the firm. The technical expert and the project manager have to establish a
good rapport before they determine the key parameters.
3.4.1 Technology Selection
It is possible that a project manager does not have the required technical
expertise. In such a case, the technical matters can be better handled by a
specialist. But it can be argued that the project managers can make good
technical decisions without deep technical knowledge.
According to W. Skinner, a management expert on technical aspects, a project
manager should ask himself the following questions to select an appropriate
technology -- What will the technology do? What will the technology not do?
What is required to adopt new technology? How much does the technology cost?
and How certain are the above apprehensions?
Apart from the above questions, the project manager also has to consider the
scope for future expansion, and experiences of the previous users. The project
manager can evaluate the project better if he has the details. Selecting an
appropriate technology also includes evaluating alternative technologies
available. Selecting an appropriate technology is also influenced by several other
factors like the capacity of the firm, inputs and their availability, investment
capability, production costs, overheads and technological upgradations.
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3.4.2 Input Requirements and Utilities

To evaluate a project idea, one must also consider the availability and utility of
the inputs. The project manager should carefully assess the materials required
and their specifications. Material inputs for any project are normally classified
into four categories: raw materials, processed industrial materials and
components, auxiliary materials and factory supplies, and utilities. Raw
materials include agricultural products, forest products, mineral products,
livestock and marine products. The project manager has to determine the
material inputs by assessing the quality of the raw materials, their costs and their
availability.
While purchasing industrial materials and components, the project manager
makes use of some testing equipments to measure parameters like quality,
quantity, and specifications. Pharmaceutical companies may use some chemicals
to test their chemical inputs. A project manager should develop a close
relationship with the input suppliers to ensure timely and economical inflow of
required inputs. Most firms make long term agreements with the suppliers till the
completion of the project.
The manufacturing process is also determined by the availability and quality of
raw materials. For example, the quality of limestone decides whether wet or dry
process is to be used in a cement plant. Proper assessment of availability of
infrastructure like power, water, steam, fuel etc should be made by the project
manager to effectively run the project. All these utilities have to be evaluated in
relation to the location, type of technology, supplier's capacity and plant
capacity. The project manager can also obtain special permission from the local
government to ensure better availability and use of several utilities.
3.4.3 Product Mix

The project manager has the choice between a broad range of products or a
shortened product mix from a study of market requirements and the firm's ability
to offer a variety of products. For example, a carpenter offers a wide range of
furniture units with different features and specifications. But a supplier of
electronic durables may offer only a limited range of products. Similarly, Xerox
offers its products only on a limited scale. The project manager increases the
product range when he adopts an expansion strategy and reduces the product
range with a retrenchment strategy.
3.4.4 Plant Capacity and Functional Layouts
Plant capacity is the ability of the firm to produce certain volumes or a certain
number of units in a given time period. It represents the production capacity of
the firm under normal working conditions. This is determined on the basis of
installed capacity, machinery, and availability of infrastructure and labor.
Input constraints, investments, market conditions, government policies,
technological upgradations, and financial resources play a critical role in
determining the capacity of a plant. Availability of skilled labor is also a crucial
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factor in evaluating the capacity of a project. Layouts are essential for setting up
an effective plant. The three types of layouts are product layout, process layout,
and fixed layout.
Product Layout
In this layout, machinery and equipment are arranged according to the products.
This layout is also referred to as an assembly line or production line, if the
equipment is dedicated to continuous production of a narrow product line.
Suppose a firm produces three products: A, B and C. According to this layout,
each product is manufactured separately and there will be no interferences in the
production lines of these three products.
Process Layout
In this layout, all similar equipment or functions are grouped together like all
lathes in one area, and all drilling machines in another area. Suppose a firm uses
three varieties of machines, say P,Q and R to produce a product X. All P type
machines are grouped at one place, all Q type machines are grouped at another
place, and all R type machines in another place.
Fixed Layout
A fixed layout is used when the product is bulky, large, heavy, and remains
stationary. For example, all manufacturing and construction firms select a fixed
position for construction and all materials, machines, sub contractors and
workers are taken to the the fixed place. Best examples of such layouts are ship
building, aircraft assembling, satellite assembling etc. The project manger can
choose any of these layouts based on the requirements of the project. Usually, no
single type of layout can exactly fulfill the purpose and the project manager may
use a combination of different types of layouts.
Activity: Once data is available on the principal dimensions of the project

like market demand, plant capacity, technology used for production, plant site
and supply of inputs for the project, the important decision is designing a
layout that best suits the project. Why do firms need a layout? What are the
different types of layout that a project manager can design? Describe the
layouts to be used for the following projects:
i. Setting up a hospital
ii. Setting up a chemical plant
Answer:
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Check Your Progress

23. Which of the following options include a study of the relevant design and
engineering aspects, and reliability and sustainability of the product?
a. Financial analysis
b. Market analysis
c. Technical analysis
d. Demand analysis
24. Samarth wanted to set up a sugar factory in Uttar Pradesh. He prepared a
project proposal and approached SBI for a loan. The bank required details
pertaining to the main products, plan outline, layout structure, soil test
reports, socio-economic conditions of the project site, licenses, HR policies,
etc., in order to decide on the proposal. What sort of an evaluation is the
bank carrying out in order to grant a loan to Samarth?
a. Market evaluation
b. Demand evaluation
c. Technical evaluation
d. Both (b) and (c)
25. Identify the statements that are true regarding plant capacity.
i. Plant capacity is the ability of the firm to produce certain volumes or a
certain number of units in a given time period.
ii. Plant capacity represents the production capacity of the firm under
normal working conditions.
iii. Plant capacity is determined on the basis of installed capacity,
machinery, and availability of infrastructure and labor.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
26. Which of the following aspects play a vital role in determining the capacity
of a plant?
i. Input constraints
ii. Investments
iii. Government policies
iv. Technological upgradations
83
27. When the equipment is dedicated to continuous production of a narrow

product line, ______________ is also called production line or assembly
line.
a. product layout
b. process layout
c. fixed layout
28. In which of the following plant layouts are similar equipment or functions
grouped together?
a. Product layout
b. Process layout
c. Fixed layout
d. Both (a) and (c)
29. Identify the layout that is used when the product is bulky and remains
stationary?
a. Product layout
b. Process layout
c. Fixed layout
d. All of the above
3.4.5 Location of the Project

Several of India’s space projects are conducted in Sriharikota as the place is
close to the Bay of Bengal. Most thermal power projects are located near rivers
to meet the high requirements of water. Airport projects are taken up in dry land
areas so as to minimize the land costs. From the above examples, it is clear that
the place of implementation of a project should be located strategically to take
advantage of benefits like availability of necessary inputs, necessary
infrastructure, and nearness to the markets.
The location of public sector undertakings is decided by the government, which
imposes certain rules and regulations on the private projects. The project
manager should carefully ensure that the location is as per the interests of the
government. The government also provides subsidies, and tax reliefs if the
projects are located in backward areas. Study of climatic conditions like
temperature, rainfall, floods, and seismic activity is very important while
choosing the location of a project.
Factors like integrating all departments of the organization, availability of
transport, safety requirements, site cost, political, cultural and economic
situation, geographical proximity to competitors are also to be considered by the
project manager in finalizing the location of a project.
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Steps in the Location and Selection Process

The size and scope of operations decide the approach to location and selection
process.
Following is a general procedure for making a location decision:
Defining multiple location objectives
The project manager formulates the broad location objectives based on the
interests and preferences of the project promoters, availability of technicians,
proximity to customers and suppliers, and other relevant factors.
Identifying relevant decision criteria
The project manager selects the project location on the basis of many economic
factors such as labor and material costs, and non-economic factors such as the
impact of the plant on the environment and community.
Relating the objectives to the criteria
The relevance of criteria should be evaluated using decision-making models/
techniques such as break-even analysis, linear programming and qualitative
factor analysis. Though firms prefer to use the aforesaid models for making the
location decision, in practice it is difficult to quantify certain aspects such as the
firm's relationship with local channel members, market sentiments etc.
Generating relevant data to evaluate the alternative locations
Alternative location choices are made that satisfy the location objectives of the
firm. They are evaluated based on the data obtained.
Selecting the best location
Finally, a location that meets the organization’s objectives, best satisfies the
criteria and benefits the community is selected.
Machinery and Equipment
Technical evaluation of a project idea should include the study of required
machinery and equipment to run the project. The machinery and technology
required depend on the plant capacity and type of process selected to implement
the project. The project manager should study constraints like transportation of
heavy equipment, import of foreign machinery, and after sales service from the
sellers of the equipment, before selecting the necessary machinery and
equipment. Machines should be installed in appropriate places and they should
be sequenced to ensure continuous flow of the production process. Experiences
of the existing users should also be taken into account to find out the practical
difficulties in running different machines. Suggestions from external technical
consultants and in-house technical experts are also helpful.
Consideration of Alternatives
No single criterion is exactly useful in transforming a good project idea into a
perfect project. A great idea might not be technically feasible. Some good ideas
may be poor at gaining a market while others may require huge investments,
85
which the firm may not have. All these constraints force the project manager to
think of alternatives and come up with a workable project idea. Reconsideration
of nature of the project also generates new ideas and makes the idea feasible.
Market characteristics also force the project manager to produce a high quality
product at a premium price or a low quality item at a cheaper price. To meet the
required market demand, the project manager has two options – either to
construct a single plant to cover the entire market or to construct multiple plants
in different locations. As none of the choices may be perfect, the ultimate
decision regarding the project will depend on the trade-off between the
economies of scale in manufacturing and the economies of distribution. The next
chapter talks about how a project manager selects a project from the several
alternatives, on the basis of the financial considerations.
Check Your Progress

30. Arrange the following steps based on the procedure followed to make
location decisions.
i. Selecting the best location
ii. Relating the objectives to the criteria
iii. Defining multiple location objectives
iv. Generating relevant data to evaluate the alternative locations
v. Identifying relevant decision criteria
a. iii-ii-v-i-iv
b. iii-v-ii-iv-i
c. iii-iv-v-i-ii
d. iii-i-ii-v-iv
31. Which of the following aspects is not covered by market and demand
analysis?
a. Specification of objectives
b. Making the location decision
c. Conducting a market survey
d. Making a situational analysis
32. Technical evaluation of a project idea does not include:
a. collection of data.
b. availability and utility of the inputs.
c. the study of required machinery and equipment to run the project.
d. location of the project.
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3.5 Summary
 Market and demand analysis and technical analysis are carried out by the project
manager in the process of evaluating a project idea.
 There are six steps in the market and demand analysis: situational analysis and
objectives specification, collection of data, market survey, market description,
demand forecasting and market planning.
 The market and demand analysis helps the project manager to understand how
the firm's abilities can be synchronized with market requirements.
 Market analysis studies market needs and consumer preferences for a given
project idea and demand analysis aims at calculating the aggregated demand for
a particular product or service.
 Technical analysis of a project idea includes designing the various processes,
installing equipment, specifying material and prototype testing.
 The project manager has to be careful in finalizing the technical aspects of the
project as the decision is irreversible and the investments involved may be high.
 The project manager has to select the technology required in consultation with
technical experts and consultants.
3.6 Glossary
 Chain ratio technique: A simple technique that applies a series of factors to
forecast the demand for a particular product or service.
 Consumption level technique: This technique estimates the demand for a
particular product or service on the basis of income and price elasticities of
demand.
 Demand analysis: It determines the aggregated demand for a product or service
for a particular period, variations in supply, hidden demands of the customers,
etc.
 Econometric technique: This technique explains the behavior of the economic
variables as per the equations developed. The equation may be a single equation
or multiple equations.
 End use technique: This technique is useful in estimating demand for
intermediate products such as investment goods and industrial tools.
 Fixed layout: It is used when the product is bulky, large, heavy, and remains
stationary.
 Income elasticity of demand: It represents the effect of the change in the
demand as a proportion to change in the income.
 Leading indicator technique: This technique is used when the change in the
value of a particular variable leads to a change in the value of another variable.
 Market analysis: It estimates the size of the potential market, patterns of
consumption, level of competition, and market composition.
87
 Plant capacity: The ability of the firm to produce certain volumes or a certain
number of units in a given time period. It represents the production capacity of
the firm under normal working conditions.
 Price elasticity of demand: It represents the effect of the change in the demand
as a proportion to change in the price.
 Primary data: Data that is collected for a specific purpose and for the first time.
 Process layout: In this layout, all similar equipment or functions are grouped
together.
 Product layout: In this layout, machinery and equipment are arranged
according to the products. This layout is also referred to as an assembly line or
production line, if the equipment is dedicated to continuous production of a
narrow product line.
 Product testing: An objective appraisal of the product performance done on a
limited scale without using the firm's brand name.
 Questionnaire: A formalized set of questions for generating information. The
questions can be structured or unstructured or a combination of both, depending
on the requirement.
 Secondary data: Data that is already available but might have been collected
for some other purpose or by some other institutions.
 Situational analysis: The process by which a project manager studies customer
preferences and their purchasing capacity and strategies of the competing firms
and intermediaries.
 Structured questions: Questions followed by a fixed number of choices from
which the respondent should choose an answer.
 Technical analysis: It includes the study of all the relevant design and
engineering aspects, reliability and sustainability of the product.
 Unstructured questions: Questions that require the respondent to give
descriptive answers.

1. Once project ideas are generated and screened, they are evaluated to test
their marketability. How does the project manager test the marketability of a
project idea? Explain in detail all the activities that are carried out by a
project manager to test the marketability of a project idea.
2. An in depth study of market and demand analysis is followed by conducting
the technical feasibility of the project. Describe all the aspects that need to
be considered while conducting the technical analysis of projects.

88


Following are the model answers to the Check Your Progress questions given in
the Unit.
1. (a) market analysis
Once project ideas have been generated and screened, they have to be
evaluated for their marketability, technical feasibility, and costs involved.
The market analysis estimates the size of the potential market, patterns of
consumption, level of competition, and market composition. The technical
analysis of a project idea includes the study of all the relevant design and
engineering aspects, and the reliability and sustainability of the product.
Demand analysis determines the aggregated demand for a product or service
for a particular period, variations in supply, hidden demands of the
customers, etc. Financial analysis involves studying the financial aspects of
the project idea. To assess the financial feasibility of a project idea, the
project manager has to examine the capital costs, operating costs, and
revenues of the proposed project.
2. (d) demand analysis
Demand analysis determines the aggregated demand for a product or service
for a particular period, variations in supply, hidden demands of the
customers, etc. The technical analysis of a project idea includes the study of
all the relevant design and engineering aspects, and the reliability and
sustainability of the product. Financial analysis involves studying the
financial aspects of a project idea. To assess the financial feasibility of a
project idea, the project manager has to examine the capital costs, operating
costs, and revenues of the proposed project. Once project ideas have been
generated and screened, they have to be evaluated for their marketability,
technical feasibility, and costs involved. The market analysis estimates the
size of the potential market, patterns of consumption, level of competition,
and market composition.
Conducting market surveys, collecting primary and secondary data, and
studying the characteristics of the market are some of the activities to test
the market environment and see whether the project idea is feasible or not.
89

The activities of a project manager in conducting a market and demand
analysis include situational analysis and objectives specification, collection of
secondary data, market survey, market description, demand forecasting, and
market planning.
5. (c) Primary data can be obtained only from sources internal to the
organization.
Primary data is data that is collected for a specific purpose and for the first
time. Secondary data is data that is already available but might have been
collected for some other purpose or by some other institutions. Primary data
can be obtained from sources both internal and external to the organization.
Internal primary data can be obtained from past and current sales of the
firm, observations of employees of the firm, etc. External primary data can
be obtained from the opinions of the dealers, feedback of the sales
personnel, and sales trends.
6. (b) Secondary data provides problem specific information.
Secondary data is data that is already available but might have been
collected for some other purpose or by some other institution. It is
considered to be more useful than primary data in market analysis as it is
easy to obtain and is also economical. Primary data provides problem
specific information, as data pertaining to a particular problem/purpose is
collected. Collection of primary data requires more time and also involves
higher costs.
7. (b) Personal interviews
The experimental method includes product testing, psychological
techniques, and consumer panel techniques. The survey method of data
collection includes personal interviews, telephonic interviews, and mail
surveys of customers or middlemen.
8. (a) a researcher tests the subconscious emotions of customers.
The experimental method includes product testing, psychological
techniques, and consumer panel techniques. In the psychological technique,
a researcher who is trained in psychology, tests the subconscious emotions
of customers. Option ‘b’ refers to the consumer panel technique, option ‘c’
refers to the survey method, and option ‘d’ to product testing.
9. (b) Consumer panel technique
The consumer panel technique is an experimental method of data collection.
A group of customers are selected on a permanent basis. They are
interviewed at different intervals of time in order to observe their behavioral
changes. This enables the project manager to understand market trends and
the changing preferences of customers.
90
10. (b) iii-v-ii-iv-vi-i

Following are the steps in a sample survey: defining the target market,
selecting the sample, developing the questionnaire, training the surveyors,
recording the information, and interpreting the information.
11. (c) questions about the present project and its products.
Target questions are about the present project and its products. The
questions have to be carefully sequenced so as to be understood by all
segments of the target customers. An understanding of the end product or
service of the project, its usage, and knowledge of human psychology are
essential in developing the questionnaire.
12. (b) Production + Trade Surplus/Deficit – Changes in Stock Level
nothing but apparent consumption. Apparent consumption is calculated as
the sum of production and trade surplus/deficit minus changes in stock level.
Due to exchange restrictions and government controls, effective demand is
usually less than apparent consumption. Apparent consumption takes into
account only the desire and ability of the buyers while effective demand also
considers the willingness of the buyers. The project manager analyzes the
present and past effective demand for the product or service.
13. (c) Willingness of the buyers
nothing but apparent consumption. Apparent consumption takes into
account only the desire and ability of the buyers. But effective demand also
considers the willingness of the buyers.
14. (b) the type of organizational structure.
The project manager can determine the total demand for the product by
dividing it into various segments on the basis of nature of the product, type
of customers, or geographical location. The market cannot be divided based
on the type of organizational structure.
The project manager forecasts the demand for a particular product or service
using information obtained from secondary sources, market surveys, and
market description. Statistical techniques like trend projections are useful in
forecasting the demand for a particular product. These methods extrapolate
past trends into the future to forecast future demand, revenues, or sales.
16. (b) Chain ratio technique
The chain ratio technique is a simple technique that applies a series of
factors to forecast the demand for a particular product or service. The
method seems simple to use, but the applicability of this method mainly
depends on the accuracy of the ratios used. The project manager should
carefully estimate these ratios to estimate the demand for a particular
product or service.
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17. (c) Consumption level technique
The consumption level technique estimates the demand for a particular

product or service on the basis of income and price elasticities of demand.
Both the income and price elasticities of demand are useful in estimating the
sensitivity of demand to changes in income and price levels, respectively.
Q2 Q1 I 2 + I1
18. (b) ei = × Income elasticity represents the effect of
I2 I1 Q 2 + Q1
the change in the demand as a proportion to change in the income. It is

Q 2  Q1 I 2  I1
calculated as e i  
I 2  I1 Q 2  Q1
where,
ei = 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
19. (c) Leading indicator technique
The leading indicator technique assumes that a change in the value of a

particular variable will lead to a change in the value of another variable.
There are two steps involved in using this technique: identifying the
appropriate leading indicators and establishing a relationship between the
leading variables and lagging variables to find the demand. For instance, an
improvement in the level of literacy of a country may lead to an increase in
the demand for paper. Here, a change in the level of literacy is the leading
variable while the change in the demand for paper is the lagging variable.
20. (b) Econometric technique
The econometric technique explains the behavior of the economic variables

as per the equations developed. This technique is useful in understanding
complex cause and effect relationships and in judging the sensitivity of
certain variables. In the end use technique, the project manager estimates the
consumption coefficient of the product for various uses for all users in the
country. The leading indicator technique assumes that a change in the value
of a particular variable will lead to a change in the value of another variable.
The chain ratio technique applies a series of factors to forecast the demand
for a particular product or service.
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21. (b) a0 + a1Pt + a2It

The econometric technique used to forecast demand explains the behavior of
the economic variables as per the equations developed. The equation may be
a single equation or multiple equations. In a single equation model, the
dependent variable is explained by several other independent variables.
With variations in population and income, the demand for a product can be
explained through the use of the following formula:
Dt = a0 + a1 Pt +a2 It
where,
Dt = demand for wheat in year ‘t’
Pt = population in year ‘t’'
It = income in year ‘t’
a0, a1, and a2 are the constants.
Statistical techniques and causal methods are prone to errors because of the
many uncertainties involved in the process of forecasting demand. The
major sources of uncertainty are techniques of forecasting, past and present
market data, and environmental change.
23. (c) Technical analysis
The technical analysis of a project idea includes the study of all the relevant
design and engineering aspects and the reliability and sustainability of the
product. An in depth market and demand analysis followed by a technical
analysis reveals the probability of success of a project idea. Financial
analysis involves studying the financial aspects of a project idea. To assess
the financial feasibility of a project idea, the project manager has to examine
the capital costs, operating costs, and revenues of the proposed project. This
is taken up in the end after the market analysis, demand analysis, and
technical analysis have been conducted.
24. (c) Technical evaluation
Technical evaluation of a project idea is a very crucial aspect of project
evaluation and any wrong decision at this stage will have far-reaching
implications on the viability of the project. This is because technical decisions
are irreversible and they require high investments. The bank should conduct a
technical evaluation for the project idea submitted by Samarth. Such an
evaluation could include an evaluation of the main products, the by-products,
scrap, plan outline, building outline, layout structure, vendors’ list for critical
equipment, soil testing, socio-economic conditions of the project site, off-site
facilities, import licenses, installed capacity, inspection and expediting,
guarantee period, cost, availability, quality, organization chart, HR policies,
training facilities, etc.
93
Plant capacity is the ability of the firm to produce certain volumes or a

certain number of units in a given time period. It represents the production
capacity of the firm under normal working conditions. It is determined on
the basis of installed capacity, machinery, and availability of infrastructure
and labor.
Plant capacity is the ability of the firm to produce certain volumes or a

certain number of units in a given time period. It represents the production
capacity of the firm under normal working conditions. Factors like input
constraints, investments, market conditions, government policies,
technological upgradations, and financial resources play an important role in
determining plant capacity. For instance, the company would decide on the
plant capacity to be installed based on the financial resources available and
the investment to be made. Government policies or restrictions would also
affect the company’s decision in this regard as also market conditions such
as the competitive scenario; demand scenario, etc.
27. (a) product layout
In product layout, the machinery and equipment are arranged according to

the products. If the equipment is dedicated to continuous production of a
narrow product line, this layout is also referred to as an assembly line or
production line.
28. (b) Process layout
In process layout, all similar equipment or functions are grouped together.

For instance, all lathes are grouped in one area and all drilling machines in
another.
29. (c) Fixed layout
A fixed layout is used when the product is bulky, large, heavy, and remains
stationary. For example, all manufacturing and construction firms select a
fixed position for construction and all materials, machines, sub-contractors,
and workers are taken to that place. The best examples of such layouts are
ship building, aircraft assembling, and satellite assembling.
30. (b) iii-v-ii-iv-i
The procedure followed to make a location decision: defining multiple

location objectives, identifying relevant decision criteria, relating the
objectives to the criteria, generating relevant data to evaluate the alternative
locations, and selecting the best location.
94
31. (b) Making the location decision
Making the location decision is a part of technical evaluation of the project

idea. Market and demand analysis covers aspects like specification of
objectives, making a situational analysis, conducting a market survey,
forecasting demand, etc.
32. (a) collection of data.

Collection of data is a part of the market and demand analysis. Technical
evaluation of the project idea includes aspects such as selecting an
appropriate technology, location of the project, availability and utility of the
inputs, study of required machinery and equipment to run the project, etc.

Following are the answers to the Exercises given in the unit.
A. 115.75 kg
Projected demand for wheat = (present per capita annual demand) (1+
projected per capita annual income level  income elasticity of demand)
= (100 kg) {1+ (0.15  1.05)} = 115.75 kg per capita per annum.
B. 2.75
Projected demand for Product P would be = (present per capita demand)
(1+ per capita income level  income elasticity of demand)
15.5 tons = (13 tons) {1+ (0.07  income elasticity of demand)}
15.5
= 1+ (0.07  income elasticity of demand)
13
1.1923 = 1+ (0.07  income elasticity of demand)
1.1923  1
Income elasticity of demand = = 2.75.
0.07
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Unit 4
Financial Analysis of Projects
Structure
4.1 Introduction
4.2 Objectives
4.3 Project Cost
4.4 Means of Financing the Project
4.5 Working Capital Requirements and Financing
4.6 Time Value of Money
4.7 Costs of Different Sources of Finance
4.8 Evaluation of Project Investments
4.9 Risk Analysis of Project Investments
4.10 Social Cost Benefit Analysis (SCBA)
4.11 Summary
4.12 Glossary
4.1 Introduction
In the previous unit, we have discussed how to conduct the market analysis and
technical analysis of projects. In this unit, we will discuss how to conduct the
financial analysis of projects. Once the commercial and technical aspects of a
project idea have been evaluated and approved, the project manager must
examine the financial feasibility of the project. Since the primary objective of
any firm is to maximize profits, the financial aspects of a project idea must be
studied carefully. Even if the project is marketable and technically feasible, it
cannot be implemented if it is not financially viable. To assess the financial
feasibility of a project idea, the project manager must examine the capital costs,
operating costs and revenues of the proposed project.
To conduct a financial analysis, the project manager must collect information
about all the costs pertaining to the project, different ways of financing the
project, working capital requirements, profitability projections and projected
cash flows of the project. On the basis of this data, the project manager can
appraise all the functions of the project and decide whether a particular project
idea is worth implementing or not. This chapter discusses the various appraisal
techniques used by the project managers to evaluate the financial viability of a
project.
This unit will introduce you to the means of financing a project. We will discuss
the working capital requirements and financing. We shall then discuss the
concepts of time value of money, cost of capital, project appraisal criteria, and
risk analysis in capital investment decisions. Finally, we would also be
discussing social cost benefit analysis.
4.2 Objectives
This unit will help you understand:
 define project cost.
 identify the means of financing a project.
 analyze working capital requirements and financing.
 discuss the time value of money.
 determine the costs of different sources of finance.
 evaluate project investments.
 perform risk analysis for project investments.
 explain social cost benefit analysis.
4.3 Project Cost
The project cost is the sum of all the costs of activities associated with the
project. It includes all costs under the following heads: building and civil works,
land and site development, plant and machinery, expenses on foreign
technicians, miscellaneous fixed assets, margin money for working capital,
provision for contingencies, pre-operative expenses and initial cash losses.
4.4 Means of Financing the Project
The project manager can finance the project in a number of ways: share capital,
term loans, debenture capital, deferred credit, and other miscellaneous sources.
Any one or a combination of two or more of these methods can be chosen to
finance the project.
4.4.1 Share Capital
Share capital is of two types: equity capital and preference capital. Equity capital
is the capital contributed by the owners of the firm. Equity holders enjoy the
profits and bear the risks of the firm. Preference capital refers to the contribution
made by preference shareholders by investing in a firm’s preference shares.
4.4.2 Term Loans
Term loans are secured borrowings provided by financial institutions and
commercial banks. These loans help firms take up expansion, modernization,
and renovation projects. Term loans are available in both rupees and foreign
currencies. Companies take foreign currency term loans to meet their foreign
currency expenditures e.g. import of machinery, or consultation fees of foreign
technicians.
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4.4.3 Debenture Capital

Debentures are issued by firms to raise debt capital, normally for a period of 5 to
10 years. The debentures are secured against the assets of the issuing firm. There
are three types of debentures: non - convertible debentures, partially convertible
debentures, and fully convertible debentures. A fixed interest is paid for non -
convertible debentures. In the case of Partially Convertible Debentures (PCDs),
only a part of them are converted into equity shares; but in the case of fully
convertible debentures, all the debentures are fully converted into equity shares
as per pre-determined terms.
4.4.4 Deferred Credit

Machinery and equipment suppliers often provide credit facilities to firms. This
is referred to as deferred credit. This credit is repaid over a period of time,
depending on the value of the machinery and the credit standing of the buyer.
Normally, suppliers demand a bank guarantee equivalent to the value of the
machinery.
4.4.5 Miscellaneous Sources

Miscellaneous sources include unsecured loans, public deposits (as per the rules
of Central Government and RBI), incentive sources form government agencies,
and leasing and hire purchase finance. But these sources contribute only a small
part of the total project capital.
4.5 Working Capital Requirements and Financing

The project manager considers the following points when estimating the working
capital requirements of a project:
 Raw materials and components

 Work-in-process
 Stocks of finished goods
 Operating expenses
The important sources of working capital are
 Working capital advances from commercial banks

 Long-term sources of financing
 Trade credit
 Accruals and provisions
The project manager should be aware of the limits for obtaining working capital
advances from commercial banks:
 The aggregate permissible bank finance, as per the norms of lending, prescribed
by the Tandon Committee.
 The amount of margin money a firm can provide against each current asset.
98
Initially, the Tandon Committee proposed a method for determining the

maximum amount of money a project can obtain to meet its working capital
requirements. According to that method, at least 25 percent of current assets
must be supported by long term sources of finance. To provide greater freedom
to borrowers to assess working capital requirements, this method (and similar
methods) was withdrawn, effective 15 April, 1997. Banks were instructed to
evolve their own methods to assess working capital requirements of projects.
The margin requirement varies with the type of current asset. The ranges within
which margin requirements lie for various types of current assets are raw
materials – 10-25%, work-in-process – 20-40%, finished goods – 30-50%, and
debtors – 30-50%. However, there is no standard formula for determining the
margin amount.
Check Your Progress

1. Identify the correct sequence of steps in which a project manager evaluates
project ideas.
a. Technical analysis – Market analysis – Financial analysis.
b. Market analysis – Technical analysis – Financial analysis.
c. Financial analysis – Technical analysis – Market analysis.
d. Market analysis – Financial analysis – Technical analysis.
2. Which of the following options is not required to assess the financial
feasibility of a project idea?
a. Capital costs
b. Operating costs
c. Price elasticity of demand
d. Revenues
3. About which of the following aspects should information be collected in
order to conduct a financial analysis of a project?
i. Costs pertaining to the project and the various ways of financing it
ii. Working capital requirements of the project
iii. Profitability projections and projected cash flows of the project
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
4. A project can be financed in a number of ways – through share capital, term
loans, issue of debentures, etc. Which of the following sources of financing
do the owners of the firm contribute?
a. Term loans
b. Equity capital
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c. Deferred credit
d. Debentures
5. Which of the following statements is not true regarding debentures?
a. Debentures are issued by firms to raise debt capital, normally for a
period of 5 to 10 years.
b. Debentures are secured against the liabilities of the issuing firm.
c. A fixed interest is paid for non-convertible debentures.
6. Machinery and equipment suppliers often provide credit facilities to firms.
This credit is repaid over a period of time, depending on the value of the
machinery and the credit standing of the buyer. What is this form of
financing known as?
a. Equity capital
b. Preference capital
c. Deferred credit
d. Term loans
7. Identify the factors that the project manager needs to consider to estimate
the working capital requirements of a project.
i. Raw materials and components
ii. Work-in-process
iii. Stocks of finished goods
iv. Operating expenses
8. Match the following current assets with the range in which the margin
requirements fall for each of them.
i. Debtors
ii. Work-in-process
iii. Finished goods
p. 20-40%
q. 10-25%
r. 30-50%
a. i/q, ii/p, iii/r
b. i/p, ii/r, iii/r
c. i/q, ii/r, iii/p
d. i/r, ii/p, iii/r
100
4.6 Time Value of Money
The project manager considers the time value of money when evaluating the
financial aspects of a project idea. To understand time value of money, consider
the investment of one rupee. One rupee invested today would generate (1+r) a
year hence, where r is the rate of return per annum. The following calculations
are used to determine time value – future value of single cash flow, future value
of annuity, present value of single cash flow, and present value of annuity.
4.6.1 Future Value of Single Cash Flow
The future value of a single cash flow is given by the following formula:
n
FV  PV(1  r)
Where, FV = Future value n years hence
PV = Present value of cash flow
r = Interest rate per annum
n = Number of years
Example: Future Value of a Single Cash Flow – Compounded Annually
Suppose the investment of Rs.100 crore is made. The rate of return is 6

percent p.a., compounded annually for the next three years.
Then the future value of the investment at the end of three years is
FV  1001  0.063  119.10 crore
The following formula is useful for calculating the future value of money when
compounding is done several times a year.

FV  PV 1  r/m  mn
Where, m = Number of times interest is paid
n = Time period
Example: Future Value of a Single Cash Flow – Compounded Semi-

Annually
Suppose the interest rate is compounded semi-annually in the above problem.

Then the future value at the end of three years is
3 2
FV  Rs.1001  (0.06  2) 
= 119.40 crore
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4.6.2 Future Value of Annuity

An annuity is a series of periodic cash flows (payments or receipts) of equal
amounts. The future value of an annuity is calculated as:
A[(1  r) n  1]
FVA n 
r
Where, A = Constant periodic flow
r = Interest rate per period
n = Duration of the annuity
Example: Calculating the Future Value of an Annuity
Suppose a project incurs an amount of Rs. 200 crore every year. Assume the
compound interest is 6.5 percent per annum. Then the future investment value
of the project after five years is:
 5
200 1  0.065  1

 
FVA 5  = Rs. 1138.72 crore.
0.065
Check Your Progress

9. Assuming that compounding is done more frequently than annual
compounding, which of the following is a generalized formula for shorter
compounding periods?
a. FV = PV (1 + r)n
 1  r n 1
b. FV = A  
 r 
m n
 r
c. FV = PV 1  
 m
 1 r n 1 
d. FV = A   (1 + r)
 r 
10. The future value of a regular annuity for a period of ‘n’ years at a rate of
interest ‘r’ is given by the formula
 1  r n 1
a. FVAn = A  
 r 
102
m n
 r
b. FV = PV 1  
 m
c. FV = PV(1 + r)n
 1 r n 1 
d. FVAn = A  n 
 r 1  r  
Exercises
A. Sridhar has invested Rs. 2,000 in a bank that pays 12% interest compounded
annually. How much will Sridhar get after 10 years?
B. In Consumers Bank, term deposits can be made for periods ranging from six
months to 10 years. The rate of interest paid is 14% per annum for a three-
year deposit and the interest is compounded every quarter. To what amount
will Rs. 10,000 invested in term deposits for three years will grow to?
4.6.3 Present Value of Single Cash Flow

The formula for calculating present value is given by:
FV
PV  n
(1  r)
Where, PV = Present value of the cash flows

r = Annual discount rate
n = Number of years
and 1/(1+r)n is called the discounting factor
When discounting is done several times, the following formula is used for
calculating the present value.
FVn
PV  mn
(1  r n )
Where, m = Number of times per year discounting is done

n = Number of years
The following formula is used to find out the present value when the cash
inflows occur in an uneven manner.
A1 A2 A3 An
PVn     .......  n
(1  r) (1  r) 2 3 (1  r)
(1  r)
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Where,
PVn= Present value of a cash flow stream
At = Cash flow occurring at the end of year t
Example: Calculating the Present Value of a Single Cash Flow
Assume a project is expected to receive Rs. 100 crore, Rs. 200 crore and Rs.
300 crore at the end of the next one, two and three years respectively, at a
discount rate of 8 percent.
Then, the present value of the cash stream to be received for the next three
years is:
100 200 300

PV3   
(1  0.08) (1  0.08) 2 (1  0.08) 3
PV3= Rs. 502.2 crore
4.6.4 Present Value of an Annuity

The following formula is used to find the present value of an annuity:
 n
A 1  r   1

 
PVA n  n
r 1  r 
Where,
PVAn= Present value of an annuity that has a duration of n periods
A= Constant periodic flow
r = Discount rate
Example: Calculating the Present Value of an Annuity
Assume the project is expected to receive Rs.200 crore for 3 years, each
payment occurring at the end of the year. Then the present value of this cash
stream, if the annual discount rate is 8 percent is
 3
200 1  0.08   1

 
PVA 3 
3
0.081  0.08
PVA3 = Rs. 515.42 crore
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Exercises
C. Srinidhi Bank has introduced a deposit scheme for all individuals and
organizations. A deposit amount is remitted and the principal is received
with an interest of 14% per annum in 12 installments. Find out the amount
of initial deposit in order to receive a monthly installment of Rs. 100 for 12
months.
D. The annuity deposit scheme of Swaraj Bank provides for a fixed monthly
income for suitable periods based on the choice of the depositor. After the
first month of the deposit, the depositor receives monthly installments
depending on the number of months he/she has chosen as the annuity period.
The rate of interest is 9% per annum. If an initial deposit of Rs. 5,000 is
made for an annuity period of 60 months, calculate the value of the monthly
annuity.
4.7 Costs of Different Sources of Finance

A project can be carried out only after the necessary finance has been collected
from different sources. Identifying the right kind of source is crucial because
each source of finance will have its own cost. The project manager has to assess
these costs.
The cost of capital is the minimum rate of return the firm must earn on its
investments in order to satisfy the various categories of investors who have made
investments in the form of shares, debentures, term loans, etc. A firm's cost of capital
is the weighted arithmetic average of the post-tax cost of various sources of long-
term finance used by it.
Example: Calculating the Cost of Capital

Suppose a firm’s capital base is Rs. 100 crore, of which Rs. 75 crore is equity
and Rs. 25 crore is debt. Assume the cost of equity is 12 percent and the post-
tax cost of debt is 8 percent. Then, the cost of capital of the firm is =
(proportion of equity  cost of equity) + (proportion of debt  cost of debt).
 75   25 
  12%     8%  = 11%.
 100   100 
4.7.1 Cost of Debt

It is the rate of discount that equates the present value of post-tax interest and
principal repayments with the net proceeds of the debt issue. The cost of debt is
represented by ‘Kd’. If the interest on debt is payable annually, following
formula is used to calculate the cost of debt.
n I1  T  R
P   n
t
t 1 
1  Kd   1  Kd 
105
Where P = Net amount realized on debt issue

I = Annual interest payable
T = Tax rate
R = Redemption price
n = Maturity period of debt
t = a parameter whose value ranges from 1 to n.
To obtain a quick estimate, the following approximated formula is used to
calculate the cost of capital.
I1  T   (R  P) n
Kd 
R  P  2
Example: Calculating the Cost of Debt
Indhra Limited has issued Rs. 20 crore worth of non-convertible debentures,
each at a face value of Rs. 100, at a rate of 12 percent. Each debenture is
redeemable at a premium of 5 percent, after 10 years. If the net amount
realized is Rs. 95, what is the cost per debenture? Assume the tax rate is 40%.
Given, I = 12, T = 0.4 P = Rs. 95,
n = 10 years, R = Rs. 105,
121  0.4  105 - 95 10

Kd  = 8.2 percent.
(105  95) 2
4.7.2 Cost of Preference Capital
It is the discount rate that equates the net proceeds from preference capital issue
to the payments associated with the same i.e., dividend payment and principal
payments. It is represented by ‘Kp’. The cost of preference capital is calculated
by using the following formula
n D R
P  
t 1
1  K p t 1  K p n
Where, P = Net amount realized per share
D = Preference dividend per share payable annually
R = Redemption price
n = Maturity period.
Following is the approximated formula to find the cost of preference capital;
D  R  P  n
Kp 
R  P  2
106
Example: Calculating the Cost of Preference Capital

The terms of the preference share issue made by ELV Industries are as
follows: each preference share has a face value of Rs. 100 and carries a rate of
dividend of 12% payable annually. The share is redeemable after 12 years at
par. If the net amount realized per share is Rs. 95, calculate the cost of
preference capital.
12  100  95 12
Kp 
(100  95) 2
= .127 or 12.7%
Check Your Progress

11. Which of the following is the minimum rate of return that a company must
earn on its investments in order to satisfy the various categories of investors
who have made investments in the form of shares, debentures or term loans?
a. Return on investment
b. Cost of capital
c. Capital recovery factor
d. Effective rate of interest
12. A company’s cost of capital is the __________ of the cost of various
sources of finance.
a. compounded value
b. weighted average
c. simple arithmetic average
d. All of the above
Exercises
E. Tushaar Manufacturing Limited issued preference shares of Rs. 100 face
value carrying a 15% dividend repayable at par after 12 years. The net
amount realized per share is Rs. 95. Find the cost of preference capital.
F. Sacred Enterprises has a total capital base of Rs. 50 million in the ratio of
1:1 of debt-equity. The post-tax costs of debt and equity are 6% and 9%,
respectively. Calculate the cost of capital of the company.
4.7.3 Cost of Equity Capital

Equity capital can be raised by issuing of external equity (allotment of shares)
and through retention of earnings. The project manager estimates the rate of
return required by equity shareholders before determining the cost of equity
capital.
107
Several approaches are available to estimate the rate of returns required by the
equity shareholder. They are:
 Dividend capitalization approach

 Capital asset pricing model approach
 Realized yield approach
 Bond yield plus risk premium approach
 Earnings-price approach
Dividend Capitalization Approach

In this approach, the market price per share is equal to the present value of the
expected dividends, discounted at the return required by the equity shareholders.
The rate of return required by the equity shareholders is represented as ‘KS’. In
symbols,
n Dt
Po  
t 1 1  K ts
Where, PO = Current market price per share of the equity stock

Dt = Expected dividend per share at the end of year, t
If equity shareholders expect a constant dividend every year, then

D
Ks 
Po
If equity shareholders expected the dividend to grow annually at a rate of g%
forever, then,
D1
Ks  g
Po
Where, D1 = Dividend Expected at the End of Year 1. That is, D1 = D0 (1 + G).
Capital Asset Pricing Model (CAPM)

According to this approach, the cost of equity is reflected by the following
equation,
Ki = rf + βi (km – rf)
Ki = Required rate of return on a security i
rf = Risk free rate of return
km = Rate of return on market portfolio.
βi = Beta of security i (Beta is a measure of volatility of a security or portfolio of

securities in comparison with the market as a whole. A beta of 1 indicates that
the security’s price will move with the market. A beta greater than 1 indicates
that the security’s price will be more volatile than the market. A beta less than 1
means that it will be less volatile than the market).
108
Example: Calculating the Cost of Equity
The beta factor of RK Industries shares is 1.4. The risk free rate of interest on
government securities is 10%. The expected rate of return on equity shares is
17%. Calculate the cost of equity.
K i  10  1.4 17  10  19.8%
Realized Yield Approach

In this approach, the rate of return realized by equity shareholders in the past is
regarded as a proxy for the rate of returns required by them. The rate of return
(yield) on an equity stock is given by the formula;
D t  Pt
Yt  1
Pt 1
Where, Yt = Yield for year t
Dt = Dividend per share, for the year t payable at the end of the year t
Pt = Price per share at the end of year t
Pt-1 = Price per share at the end of year t -1, i.e., at the beginning of year t
D t  Pt
Yt   1 is also called as wealth ratio, denoted by Wt
Pt 1

The yield for an n-year period is W1  W2  ...... Wn 1/n 1
D t  Pt
Here, Wt 
Pt  1
Bond Yield Plus Risk Premium Approach

According to the approach, the rate of return required by the equity shareholders
is based on the risk profile of a company. So, the rate of return required by the
equity shareholders is calculated as, yield on the long-term bonds of the firm +
risk premium.
Earnings Price Ratio Approach

According to this approach, the rate of return required by equity shareholders is
E1  P0
equal to.
Where, E1 = Expected earnings per share for next year
P0 = Current market price per share
E1 is calculated by multiplying the current earnings per share by (1 + growth
rate).
109
Check Your Progress

13. According to the Dividend Capitalization approach, the cost of equity
capital is given by:
D0
a. Ks  g
P0
D
b. Ks  1  g
P0
D 0 1  g 
c. Ks  g
P0
D 0 1  g 
d. Ks  g
P0
14. In the Capital Asset Pricing model, to know the cost of equity we require
i. the risk free rate of return
ii. the return on investment.
iii. the rate of return on market portfolio
iv. the beta of security
Exercises
G. The current dividend paid by LMG Limited is Rs. 15 per share and it is
expected to grow at 5% infinitely. If the current market price per share of
LMG is Rs. 75, calculate the cost of equity.
H. Following are the dividend per share and price per share details of an equity
stock over a period of 10 years.
Year Dividend per Share (Rs.) Price per Share (Rs.)

1 10 10
2 10 12
3 12 14
4 13 12
5 10 10
6 12 15
110
Year Dividend per Share (Rs.) Price per Share (Rs.)

7 14 10
8 15 10
9 15 12
10 15 12
Calculate the average yield of the equity stock.
4.7.4 Cost of External Equity

It is the rate of return that the firm must earn on the net funds raised by it when it
issues equity capital externally so that equity investors earn the required rate of
return on their subscription to the equity capital of the firm. Cost of external
equity is represented by ‘KS.’ The following approaches are useful to calculate
cost of external equity.
Dividend Capitalization Approach

According to this approach, the cost of external equity (Ks) is calculated as
D1
Ks  g
Po 1  f 
Where, D1 = Dividend expected at the end of year 1

f = Floatation costs (legal, printing, underwriting, brokerage, issue expenses etc.)
expressed as a percentage of the current market price.
P0 = Current market price per share
g = Dividend growth rate
Capital Asset Pricing Model and Other Approaches

The following formula is useful to calculate cost of external equity.
Ke
Ks 
1  f 
Ke = Rate of return required by equity investors
Example: Calculating Cost of External Equity using CAPM

Happy Homes Private Limited decided to raise some equity from the market.
The issue costs are 10% of the issue amount, and the investors are expecting a
return of 28% from their investment. Calculate the cost of external equity of
the company.
Ke
Ks 
1 f
111
Ks = cost of external equity

Ke = rate of return required by the equity investors = 28%
f = floatation costs as a percentage of the current market price = 10%
Ke 0.28
Ks  = = 0.3111 or 31.11%.
1 f 1  0.10
Cost of Retained Earnings

Two approaches are useful to determine the cost of retained earnings. They are
 Tax adjusted rate of return approach

 External yield approach
Tax-adjusted rate of returns approach
According to this approach, the cost of retained earnings is calculated as the
post-tax rate of return available to the investor. So, the ‘Ks’ has to be adjusted
for ordinary and long-term capital gains tax as expressed below:
1  t p 
Kr  Ks
1  t g 
Kr = Cost of retained earnings
Ks = Rate of return required by equity investors

tp = Ordinary personal income tax
tg = Personal long term capital gains tax rate
This approach has two limitations: The income tax rate varies from stakeholder
to stakeholder and alternative investment opportunities of the firm are not being
considered as the firm reinvests its cash flows instead of paying dividends.
External yield approach
Here, the firm evaluates the possibility of purchasing shares of other companies
with similar characteristics of risk. So, the opportunity cost of retained earnings
is considered equal to the rate of return that can be earned on such investment.
4.7.5 Weighted Average Cost of Capital

The Weighted Average Cost of Capital is the sum of the weighted values
obtained by multiplying the cost of each source of financing by its proportion in
the capital structure.
The Weighted Average Cost of Capital is calculated as:
k a  w d k d  w pk p  w ek e
112
where ka = Weighted average cost of capital

kd = Cost of long-term debt capital
kp = Cost of preference capital
ke = Cost of equity
wd= Proportion of long-term debt in the capital structure
wp = Proportion of preference capital in the capital structure
we= Proportion of equity in the capital structure
Here, the value of (wd + wp + we) is equal to 1.
Check Your Progress

15. If ‘Ke’ is the cost of equity and ‘f’ is the floatation cost as percent of the
amount raised, cost of external equity, ‘Ks’ is given by
Ke
a. Ks 
1 f
b. K K f
s e
Ke
c. Ks 
1 f
d. K K f
s e
Exercises
I. The cost of retained earnings of a company is 21%. If the issue expenses as
a percentage of the issue amount are 7%, calculate the cost of external
equity of the company.
(Questions J-O)
Happy Home Needs Private Limited has the following capital structure.
(Rs. in millions)
Equity Capital (10 million shares at par value) 100

12% Preference Capital (1 million shares at par value) 100
Retained Earnings 100
15% Non-convertible Debentures (1 million debentures at par value) 100
16% term loan from SBI 100
Total 500
113
Following are the other details provided by the company.
 The market price per equity share is Rs. 50. The next expected dividend is Rs.
10 per share and it is expected to grow at a constant rate of 8%.
 The preference shares are redeemable after seven years at par and are currently
quoted at Rs. 80 per share in the stock exchange.
 The debentures are redeemable after five years at par and their current market
price is Rs. 95 per debenture. The tax rate is 40%.
Based on the given data, answer the following questions.
J. Calculate the cost of equity capital.
K. Calculate the cost of retained earnings.
L. Calculate the cost of debentures.
M. Calculate the cost of preference capital.
N. Calculate the weighted average cost of capital of the company.
4.8 Evaluation of Project Investments
The project manager uses the following criteria to evaluate returns from project
investments. They are:
 Non-discounting criteria
 Discounting criteria
4.8.1 Non-Discounting Criteria
The non-discounting criterion does not consider the time value of money.
Following are the two methods in non-discounting criteria:
 Average Rate of Return (ARR)

 Payback period
4.8.2 Average Rate of Return (ARR)
This method estimates the relationship between the average annual profits earned
by a project and the investments made in the project. This is expressed in
percentage form.
Average Annual Profit

Average Rate of Return   100
Initial Investments
4.8.3 Accept - reject criterion
A project is accepted when the actual ARR is higher than the minimum desired
ARR. The project manager can also rank all the alternative options in descending
order and choose the project with the highest ARR.
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4.8.4 Advantages of ARR

 The method is simple to calculate, as it uses readily available accounting
information.
 A quick decision can be taken comparing the ARR values of various projects.
4.8.5 Disadvantages of ARR

 It Ignores The Time Value Of Money.
Example: Evaluation of Projects – Using the ARR Method

Assume there are two investment options. For Investment 1, the initial
investment is Rs.10,000 and the average profit is Rs. 1250; for Investment 2,
the initial investment is Rs.10,000 and the average profit is Rs. 1800. Using
the ARR method, the two proposals can be evaluated in the following manner.
Investment 1:
Average profit = Rs.1,250
Initial investment = Rs.10,000
Rs.1,250
ARR   100  12.5%
Rs.10,000
Investment 2:
Average profit = Rs.1,800
Initial investment = Rs. 10,000
Rs.1800
ARR   100  18%
Rs.10,000
According to the ARR method, Investment 2 is better as it generates a higher
average rate of return than Investment 1.
Payback Period Method

Payback period is the time period in which a firm can recover its investments
made in a project.
4.8.6 Accept-Reject criterion

The actual payback period of a project is compared with a pre-determined
payback set by the firm’s management. If the actual payback period is less than
the predetermined payback period, the project can be accepted; otherwise, the
project is rejected. The project manager can also rank alternative project
proposals according to their payback period and the project with shortest
payback period is chosen.
Advantages of payback method

 The method favors the projects with substantial cash inflows in earlier years.
 The method is easy to understand and does not require complex calculations.
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Disadvantages of payback period

 It measures only the capital recovery of the projects, not their profitability.
 The method ignores cash flows beyond the payback period.
Example: Evaluation of Projects – Using the Payback Period Method

Suppose a firm has two options, Option A and Option B. The initial outlay for
both the options is Rs.10,000. The expected cash flows for both options are as
follows:
Option A:
Year Cash Flow
1 4000
2 6000
3 4000
4 1000
The payback period for Option A is two years: Rs. 4000 (year 1) + Rs.6,000
(year 2)
In two years, the total investment is recovered. Hence, the payback period is
two years.
Option B:
Year Cash Flow

1 1000
2 2000
3 5000
4 5000
5 6000
The payback period for option B is 3.4 years:

1000 (year 1) + 2000 (year 2) + 5000 (year 3) + 2000/5000 (40% of year 4)
For option B, the total investment is recovered in 3.4 years.
 Hence, option A is accepted.
4.8.7 Discounted Cash Flow Criteria

In this criteria, the time value of money is considered when evaluating the costs
and cash flows of a project. There are three methods:
 Net present value method (NPV)

 Internal rate of return (IRR)
 Profitability Index
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Net Present Value Method (NPV)

The net present value of a project is equal to the sum of all the cash flows
associated with the project. In this method, all the future cash flows are
converted into their present values, using the required rate of return. The
difference between the present value of cash outflows and the present value of
all cash inflows gives the net present value.
The net present value of a project is calculated by the following formula:
At
NPV  
t
(1  k)
Where t= Time period

k= Required rate of return
A= Cash flows
Accept-reject criterion
In the NPV method, the project is accepted if the NPV is positive and rejected if
it is negative.
Advantages of NPV
 This method considers the time value of money.
 It considers the total benefits accruing out of the option over its life -time.
Disadvantages of NPV
 It is difficult to calculate and understand, compared to the earlier methods.

 The NPV may not give satisfactory results when the project manager has to
choose between projects of different duration. In general, the one with a shorter
economic life is preferred, other things remaining same.
Example: Evaluation of Projects – Using the NPV Method
Suppose a firm has two options; each of them costing Rs.10,000 and having a
life period of 5 years. Assume a required rate of return of 8%, after taxes. The
net cash flows for both the projects are shown below. Which option should be
accepted?
Option-1:
Year Net cash flows
1 5000
2 5000
3 4000
4 3000
5 500
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Option-2:
Year Net cash flows
1 4000
2 5000
3 4500
4 3500
5 3000
For Option-1, the NPV is:
5000 5000 4000 3000 500
 10000      = Rs. 4,636.
1.08 1.082 1.083 1.084 1.085
4000 5000 4500 3500 3000
 10000      = Rs. 6,177.
1.08 1.082 1.083 1.084 1.085
 Since the NPV of Option-2 is higher, it is accepted.
Internal Rate of Return (IRR)

The internal rate of return is the discount rate at which the present values of cash
outflows and cash inflows are equal. In other words, it is the discount rate that
makes the NPV of the project equal to zero.
Mathematically, it is expressed as:
n At
 0
t  0 (1  r) t
Where r = Internal rate of return
A = Cash flows
t = Time period
The actual IRR value is compared with the cut-off rate (set by the project firm).
The project is accepted if the IRR exceeds the cut-off rate.
Advantages of IRR
 The IRR indicates the profitability of a proposal.
 It is consistent with the overall objective of maximizing shareholders wealth.
Disadvantages of IRR
 It involves complex calculations.

 The method assumes that all intermediate cash flows are reinvested at the IRR
rate.
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Example: Evaluating of Projects – Using the IRR Method

Consider the earlier example given in the NPV method, for Option 1,
4000 5000 4000 3000 500

10000      0
1 r 1 r 1 r 1 r 1  r5
2 3 4
To solve this, we consider interest rates on a trial and error basis and find the
rate that makes sum of cash flows equal to zero.
Here r = 28.7%.
For Option 2:
4000 5000 4500 3500 3000

10000      0
1 r 1 r 1 r 1 r 1 r5
2 3 4
r = 30.63%
So, we select Option-2 as it has the higher IRR.
Profitability Index or Benefit-Cost Ratio (B/C ratio)

The ratio of future cash benefits to the initial outflows is called as profitability
index.
It is calculated as:
PV of future cash flows
Profitability Index (PI) 
Initial Investments
n A
t

t  1 (1  r ) t
PI 
C
o
Where, r = Required rate of return on the proposal
The PI gives the ratio of benefits to costs. If PI<1, the project should be rejected.
If PI >1, it means the benefits of the project exceed its costs and so it can be
accepted.
Advantages of PI
 Considers the time value of money.

 Enables comparison of various alternatives.
Disadvantages of PI
 The concept is similar to NPV.
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Example: Evaluation of Projects – Using the PI Method

Consider the earlier example given in the NPV method,
14,636
For Option 1, PI   1.46
10,000
16,177
For Option 2, PI   1.6177
10,000
 Since the PI of Option 2 is higher, it is accepted.
Exercises
O. A company is considering an investment option. The initial investment is
Rs. 200,000 and the average annual profit is Rs. 25,000. Calculate the
average rate of return of the proposal.
P. Project Z requires an investment of Rs. 20 million. The cash flows generated
by the project are given below. What is the payback period for the project?
End of Year 1 2 3 4 5 6
Cash flow (in Rs. million) 1 2 4 5 8 5
(Questions Q-T)
A firm has two options; each of them costing Rs. 50,000 and having a life period
of 5 years. Assume a required rate of return of 7%, after taxes. The net cash
flows for both the projects are shown below.
Option 1:
Year Net cash flows

1 20000
2 20000
3 15000
4 10000
5 9000
Option 2:
Year Net cash flows

1 15000
2 20000
3 15000
4 10500
5 8000
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Based on the data given above, calculate the following.

Q. The NPV of Option 1.
R. The NPV of Option 2.
S. PI of Option 1.
T. PI of Option 2.
4.9 Risk Analysis of Project Investments

Every project is exposed to a certain amount of risk and the extent of risk varies
from project to project. So, the project manager should attempt to estimate the
possible level of risk his project is likely to be exposed to.
Suppose the project manager has a choice two between two alternatives, X and
Y, each involving the same investment, but offering different outcomes as given
below:
The expected outcome of Proposal X is (10,000 x 0.5 + 0 x 0.5) = 5,000;
Therefore, the expected outcome of both proposals are equal. If the project
manager does not want to take any risk, he prefers Proposal Y. The project
manager can also take up Proposal X, if he wants to take up some risk.
Proposal Possible Outcome Probability

X 10000 0.5
0 0.5
Y 5000 1
Normally, three types of project risks are studied for each project idea. They are
stand alone risk, corporate risk, and systematic risk.
Stand Alone Risk

Stand alone risk refers to the risk a project faces when it is considered in
isolation.
Corporate Risk
This refers to the risk a firm faces because of a project.
Systematic Risk
This risk is caused by the existing market situation. This risk is also called
market risk.
4.9.1 Techniques of Risk Analysis

Firms follow different techniques to protect their projects from risks. Some of
the techniques used by firms are Sensitivity Analysis, Scenario Analysis, etc.
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Sensitivity Analysis
This technique is used to find out how sensitive the results of a particular financial
model are to changes in input variables. For example, the net present value of a
project depends on several factors like selling price of the product, annual sales,
project life period, income tax etc. Sensitivity analysis aims at examining how net
present value changes with changes in the above factors. To carry out this analysis,
the project manager establishes a relationship between the net present value and
factors that affect the net present value. Then he studies the range of net present
values with variations in each of the factors affecting it. By understanding the
affect of several factors, the project manager estimates the possibility of achieving
the project objectives.
Scenario Analysis
In sensitivity analysis, we can study the changes in the NPV with changes in one
of the variables. But most of the time in real life projects, two or more variables
change at the same time and the changes may be interrelated. In such situations,
scenario analysis is used. If the variables are interrelated, then it is helpful to
look at some plausible market scenarios or market conditions where each
scenario represents a consistent combination of variables. This type of analysis is
called scenario analysis.
In scenario analysis, different scenarios are generated and the desirability of the
project is studied in each scenario. The objective of such scenario analysis is to
get a feel of what happens under the most favorable or the most adverse
combination of key variables, without bothering much about the internal
consistency of such combinations. Therefore, it is considered to be the most
suitable technique for analyzing the fate of a project in different scenarios or
market conditions.
Check Your Progress

16. The risk that a project faces when it is considered in isolation is termed
a. Systematic risk
b. Stand alone risk
c. Market risk
d. Corporate risk
17. If you want to analyze the fate of a project under different market
conditions, then the most appropriate analysis would be a
a. sensitivity analysis.
b. scenario analysis.
c. Monte Carlo simulation.
d. All of the above
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18. Sensitivity analysis

a. is one of the tools of technical appraisal.
b. examines the impact of change in the net present value with changes in
one of the project variables.
c. studies the impact of changes in multiple variables at a time on the
internal rate of return.
d. involves imitating the behavior of some situation or process by using a
similar situation in order to study the characteristics of the variables in
the situation.
4.10 Social Cost Benefit Analysis (SCBA)

Since projects affect society, they should also be studied from the point of view
of society. So the project manager has to analyze the social and economic
benefits generated by the project and also the social costs of the project.
Social costs refer to the harmful effects of a project to society like air pollution,
water pollution, soil erosion, deforestation, production of harmful products, etc.
Social benefit refers to the positive impact of a project on society like increase in
employment opportunities, rise in per capita income etc. The objective of a
Social Cost Benefit Analysis is to assess the positive and negative effects of a
project on society. The project manager finally chooses the project that is
socially beneficial.
4.10.1 Indicators of Social Desirability of a Project
There are several evaluation methods for testing the social desirability of a
project. Some of the important indicators of the social desirability of a project
are discussed below.
Employment Opportunities
Unemployment is a major problem in developing countries like India. So, a

project with high employment potential is desirable. Since there is surplus labor
in these countries, labor intensive projects would generate more employment
opportunities.
Foreign Exchange Benefits
Countries that are experiencing a foreign exchange crunch give preference to

projects that earn foreign exchange. An import substitution project that saves the
country's foreign exchange is thus a desirable project.
Output per Unit of Capital
In countries where there is a dearth of capital, a project that gives a higher output
per unit of capital employed is preferred.
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Value Addition Criterion

The 'Value addition' of a project refers to the difference between the market price
of a project's output and the costs/price of the goods and services bought from
other firms for carrying out the project. According to this approach, the value
added per unit of capital is ascertained so that the project that gives higher value
can be chosen.
Cost Benefit Ratio

The social costs and social benefits associated with a project are calculated and
the project that provides more benefits than costs is selected and implemented.
Here, costs and benefits are ascertained based on the shadow prices. The shadow
price is the real price that would have prevailed had there been no imperfections
in the market. Then these costs and benefits are discounted to the present value
of social costs and benefits and the ratio of benefits to the costs gives the cost
benefit ratio.
4.10.2 UNIDO Approach

Social Cost Benefit Analysis is a useful tool for selecting a project. However, it
is not easy to quantify the social costs and social benefits. The United Nations
Industrial Development Organization (UNIDO) has therefore developed a
method for measuring social costs and social benefits.
The method consists of five steps:
 Calculating financial profitability at market prices

 Calculating net benefits at economic prices
 Adjustment for project's impact on savings and investment
 Adjustment for project's impact on income distribution
 Adjustment for impact of project on merit and demerits goods
4.10.3 Calculation of Financial Profitability at Market Prices

In this step, the project manager assesses the net profitability of the project on the
basis of the market prices of all inputs and outputs. The profit is obtained by
subtracting the expenditure incurred from the firm’s revenues. The project manager
calculates the profitability of the project as the percentage of profit to the capital
employed.
4.10.4 Calculation of Net Benefits at Economic Prices

In this step, the project manager measures the net benefits of the project in terms
of economic prices (also called shadow prices). These are calculated on the basis
of impact of the project on the national economy.
If the project’s product has an impact on consumption, then the price that the
consumer is willing to pay for the product becomes the shadow price of the
product. If the impact is on production, shadow price is the cost of production. If
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the impact of the product is on international trade, then the shadow price is the
foreign exchange value of the product. In the case of pure tradable goods, the
shadow price of a good is the international price of the good since there exists no
opportunity cost in the country. Taxation makes it difficult to calculate shadow
prices.
4.10.5 Adjustment for Project’s Impact on Savings and Investment
In this step, the project manager estimates the impact of the project on the
savings of different social groups like the customers, government and other
private businesses.
The impact on savings is measured as:  Δ i MPS i
Where, Δ i is the net income change because of the project and MPSi is the
marginal propensity to save. The marginal propensity to save is the fraction of
each extra rupee of income that goes to saving.
Example: Marginal Propensity to Save
Assume three groups were affected by the project and their net income gains
were;
Group 1: Rs. 10,000;
Group 2: (Rs. 8,000); and
Group 3: Rs. 7,500
MPS1 = 0.03, MPS2 = 0.15 and MPS3 = 0.42.
The impact of the project on the savings of these groups is:
(10,000  0.03) + (-8,000  0.15) + (7,500  0.42) = Rs. 2,250.
4.10.6 Adjustment for Project’s Impact on Income Distribution
Projects that increase the income of weaker sections of society must be

preferred. The project manager considers the elasticity of marginal utility of
income to understand the redistribution of income. The elasticity of marginal
utility of income is defined as the rate at which the marginal utility of income
falls with an increase in income level.
Suppose the marginal utility of income decreases by 5% with a 5% increase in
income, then the elasticity of marginal utility of income is 1. In other words, a
gain of Rs. 10 to a person earning Rs. 1,000 a year is the same as a gain of Rs.
1,000 to a person earning Rs. 1,00,000 a year. So the project manager assigns
weights to each income group on the basis of income levels. More weight is
given to low income groups and less weight is assigned to high income groups.
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4.10.7 Adjustment for Project’s Social Value

In this step, the project manager considers the social and economic value of the
project’s goods. Goods are divided into merit goods and demerit goods on the
basis of their social and economic value. Merit goods are those goods whose
social value is more than their economic value. For example, petroleum products
are merit goods as the production of petroleum products reduces the country’s
dependence on foreign supplies. Goods such as alcohol are, however, demerit
goods as they produce negative effects on society.
The procedure for adjustment of social values is given below. Suppose the economic
value of the project output is Rs. 20 million. And suppose that the social value of the
project output exceeds its economic value by 20%. So, the adjustment factor is 0.2
(120 percent/ 100 percent -1). By multiplying the adjustment factor with the
economic value of the project output, we obtain an adjustment of Rs. 4 million. The
social value of the project will therefore be Rs. 20 million (economic value) plus Rs.
4 million, i.e. Rs. 24 million.
Check Your Progress

19. Which of the following techniques assesses the positive and negative effects
of a project on society?
a. Scenario analysis
b. Sensitivity analysis
c. Social cost benefit analysis
20. Which of the following institutions has developed a method for measuring
social costs and social benefits?
a. Project Management Institute
b. American National Standards Institute
c. United Nations Industrial Development Organization
d. Federation of Indian Chambers of Commerce and Industry
21. The United Nations Industrial Development Organization (UNIDO) has
developed a method for measuring social costs and social benefits. Arrange
the following steps into the sequence in which they should be carried out in
that method.
i. Adjust for impact of the project on merit and demerit goods
ii. Adjust for the project’s impact on savings and investment
iii. Calculate financial profitability at market prices
iv. Adjust for the project’s impact on income distribution
v. Calculate net benefits at economic prices
a. iii-ii-v-i-iv
b. iii-v-ii-iv-i
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c. iii-iv-v-i-ii
d. iii-i-ii-v-iv
22. Profitability of the project is the
a. sum of profit and capital employed.
b. percentage of profit to the capital employed.
c. percentage of capital employed to the profit.
d. difference between profit and capital employed.
23. Which of the following options would be the best to use in order to
understand the redistribution of income?
a. Price elasticity of demand
b. Income elasticity of demand
c. Elasticity of marginal utility of income
d. All of the above
24. Identify the statements that are not correct with regard to the elasticity of
marginal utility of income.
i. Elasticity of marginal utility of income is used to understand the
redistribution of income.
ii. Elasticity of marginal utility of income is the rate at which the marginal
utility of income increases with an increase in income level.
iii. The project’s impact on income distribution is adjusted by assigning
weights to each income group on the basis of income levels.
iv. Weights are given based on the income levels, i.e., less weight is given
to low income groups and more weight is assigned to high income
groups.
a. Only i and ii
b. Only i and iii
c. Only ii and iv
d. Only iii and iv
25. Goods whose social value is more than their economic value are called
a. merit goods.
b. veblen goods.
c. demerit goods.
d. giffen goods.
Exercises
U. The net income gains of Group P, Group Q, and Group R because of
execution of a project are Rs. 10,000, Rs. 9,000, and Rs. 12,000. The
marginal propensity to save (MPS) of P, Q, and R is 0.02, 0.12, and 0.03,
respectively. Calculate the net impact of the project on the savings of the
three groups.
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V. The net income gains of Group X, Group Y, and Group Z because of

execution of a project are Rs. 15,000, Rs. 12,000, and Rs. 17,000. The
marginal propensity to save (MPS) of X and Y is 0.05 and 0.10,
respectively. The net impact of the project on the savings of these three
groups is Rs. 2,630. Calculate the MPS of Z.
4.11 Summary
 The primary objective of any project is to earn reasonable returns for the
investment made.
 The project manager must examine the financial feasibility of projects when
selecting a project for implementation.
 In this process, the project manager first estimates the total cost of the project
and then identifies various means for financing the project.
 Share capital, term loans, debenture capital, deferred credit are some of the
means for financing a project. Then the project manager identifies the working
capital needs of the project and the means for financing the needs.
 The project manager uses two criteria to evaluate rate of returns of project
investments: non-discounted criteria and discounted criteria.
 The time value of money is ignored in non-discounted criteria but is considered
in the discounted criteria.
 The important methods in the non-discounted criteria are Average Rate of
Return and Payback Period method.
 The time value of money is considered in the discounted criteria, and Net
Present Value, Internal Rate of Return, and Profitability Index are important
methods in this criteria.
 Sensitivity analysis and scenario analysis are used by the project manager to
analyze the risks involved in each project investment.
 Also, the project manager studies each project proposal from the point of view
of the society.
 Project managers use Social Cost Benefit Analysis to study a project’s impact
on the society. The United Nations Industrial Development Organization
(UNIDO) has developed an approach, called UNIDO approach in this regard.
4.12 Glossary
 Corporate risk: This refers to the risk a firm faces because of a project.
 Cost of capital: The minimum rate of return the firm must earn on its
investments in order to satisfy the various categories of investors who have
made investments in the form of shares, debentures, term loans, etc. A firm’s
cost of capital is the weighted arithmetic average of the post-tax cost of the
various sources of finance used by it.
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 Cost of debenture: The discount rate at which the present value of post-tax
interest and principal repayments is equal to the net proceeds from the issue of
debentures.
 Cost of external equity capital: The rate of return that the company must earn
on the net funds raised by it when it issues equity capital externally.
 Cost of preference capital: The discount rate that equates the net proceeds
from the preference capital issue to the payments associated with it like dividend
payment and principal payments.
 Deferred credit: The credit provided by the machinery and equipment suppliers
is referred to as deferred credit.
 Internal rate of return: The discount rate at which the present values of cash
outflows and cash inflows are equal.
 Net present value: The sum of the present values of all the cash inflows and
cash outflows associated with the project.
 Payback period: The time period during which a firm can recover the
investments it has made in a project.
 Profitability index: The ratio of future cash benefits to the initial outflows is
called as profitability index. It is also called as benefit-cost ratio.
 Project cost: The project cost is the sum of all the costs of the activities
associated with the project.
 Scenario analysis: In this case, different scenarios are generated and the
desirability of the project is studied in each scenario. The objective of such
scenario analysis is to get a feel of what happens under the most favorable or the
most adverse combination of key variables, without bothering much about the
internal consistency of such combinations.
 Sensitivity analysis: This technique is used to find out how sensitive the results
of a particular financial model are to changes in input variables.
 Social benefit: It refers to the positive impact of a project on society, like
increase in employment opportunities, rise in per capita income etc.
 Social cost benefit analysis: It assesses the positive and negative effects of a
project on society. According to this analysis, the project manager chooses the
project that is socially beneficial.
 Social cost: It refers to the harmful effects of a project to society like air
pollution, water pollution, soil erosion, deforestation, production of harmful
products, etc.
 Stand alone risk: It refers to the risk a project faces when it is considered in
isolation.
 Systematic risk: This risk arises from the existing market situation. This risk is
also called market risk.
 Weighted average cost of capital: The sum of weighted values obtained by
multiplying the cost of each source of financing by its proportion in the capital
structure.
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1. To conduct a financial analysis, the project manager must collect
information about all the costs pertaining to the project and the different
ways of financing a project. Explain project cost. What are various means
of financing a project? Explain in detail about the importance of working
capital in projects.
2. The project manager considers the time value of money when evaluating
the financial aspects of a project idea. Discuss in detail the concept of the
time value of money, and its related concepts.
3. The project manager uses the discounting and non-discounting criteria to
evaluate returns from project investments. Explain these criteria giving
details of the acceptance-rejection criterion, their advantages and
disadvantages.
4. Every project is exposed to a certain amount of risk and the extent of risk
varies from project to project. Explain the various techniques used by a
project manager to estimate the possible level of risk a project is likely to
be exposed to.
5. As projects affect society, they should be studied from the point of view of
society. The project manager has to analyze the social and economic
benefits generated by the project and also the social costs of the project. In
this context, discuss the concept of social cost benefit analysis.


Following are the model answers to the Check Your Progress questions given in
the Unit.
1. (b) Market analysis – Technical analysis – Financial analysis.
Once project ideas have been generated and screened, they are evaluated for
marketability, technical feasibility, and cost factors. The project manager first
conducts a market analysis; a technical analysis of the project idea then
follows. Once the commercial and technical aspects of a project idea have
been evaluated and approved, the project manager examines the financial
feasibility of the project.
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2. (c) Price elasticity of demand
To assess the financial feasibility of a project idea, the project manager must
examine the capital costs, operating costs, and the revenues of the proposed
project. Price elasticity of demand is part of conducting the demand analysis
of a product and is used to forecast demand.
To assess the financial feasibility of a project idea, the project manager must
examine the capital costs, operating costs, and revenues of the proposed
project. To conduct a financial analysis, the project manager must collect
information about all the costs pertaining to the project, different ways of
financing the project, working capital requirements, profitability projections,
and projected cash flows of the project.
4. (b) Equity capital
Share capital is of two types – equity capital and preference capital. Equity
capital is the capital contributed by the owners of the firm. Equity holders
enjoy the profits and bear the risks of the firm. Term loans are secured
borrowings provided by financial institutions and commercial banks. These
loans help firms take up expansion, modernization, and renovation projects.
Deferred credit refers to the amount that a firm receives but has still not
reported as income. The amount is actually a liability that is realized at a
future date, when the goods or services are provided. In a project, the
machinery and equipment suppliers may provide credit facilities to firms.
This credit amount is repaid over a period of time depending on the value of
the machinery and the credit standing of the buyer. Generally, suppliers
demand a bank guarantee which is equivalent to the value of the machinery.
It is repaid over a period of time, depending on the value of the machinery
and the credit standing of the buyer. Debentures are issued by firms to raise
debt capital, normally for a period of 5 to 10 years. The debentures are
secured against the assets of the issuing firm.
5. (b) Debentures are secured against the liabilities of the issuing firm.
Debentures are issued by firms to raise debt capital, normally for a period of
5 to 10 years. The debentures are secured against the assets of the issuing
firm. There are three types of debentures: non-convertible debentures,
partially convertible debentures, and fully convertible debentures. A fixed
interest is paid on non-convertible debentures. In the case of partially
convertible debentures, only a part of them are converted into equity shares.
Where fully convertible debentures are concerned, all the debentures are
fully converted into equity shares as per pre-determined terms.
131
6. (c) Deferred credit

Deferred credit refers to the amount that a firm receives but has still not
reported as income. The amount is actually a liability that is realized at a
future date, when the goods or services are provided. In a project, the
machinery and equipment suppliers may provide credit facilities to firms.
This credit amount is repaid over a period of time depending on the value of
the machinery and the credit standing of the buyer. Generally, suppliers
demand a bank guarantee which is equivalent to the value of the machinery.
Share capital is of two types – equity capital and preference capital. Equity
capital is the capital contributed by the owners of the firm. Equity holders
enjoy the profits and bear the risks of the firm. Preference capital refers to
the contribution that preference shareholders make by investing in a firm’s
preference shares. Term loans are secured borrowings provided by financial
institutions and commercial banks. These loans help firms take up
expansion, modernization, and renovation projects.
The project manager should consider the following factors while estimating
the working capital requirements of a project -- raw materials and
components, work-in-process, stocks of finished goods, and operating
expenses. Working capital is the capital required to carry out the day-to-day
operations of the firm. Raw materials, components, operating expenses, etc.,
are the items that would need capital at various points of time. Therefore,
the requirements of raw materials, components, etc., are found out in order
to estimate the working capital requirements of the firm.
8. (d) i/r, ii/p, iii/r
The margin requirement varies with the type of current asset. The ranges
within which margin requirements lie for various types of current assets are
are: raw materials – 10-25%, work-in-process – 20-40%, finished goods –
30-50%, and debtors – 30-50%.
m n
 r
9. (c) FV = PV 1  
 m
The generalized formula for shorter compounding periods is
m n
 r
FV = PV 1  
 m
where,
FV = Future value n years hence
PV = Present value of cash flow
r = Interest rate per annum
m = Number of times interest is paid
n = Number of years
132
 1  r n  1
10. (a) FVAn = A  
 r 
An annuity is a series of periodic cash flows (payments or receipts) of equal

amounts. The future value of an annuity is calculated as:
A[(1  r) n  1]
FVA n 
r
Where, A = Constant periodic flow
r = Interest rate per period
n = Duration of the annuity
11. (b) Cost of capital
Cost of capital is the minimum rate of return that a company must earn on
its investments in order to satisfy the various categories of investors who
have made investments in the form of shares, debentures, or term loans.
The cost of capital of a company is the weighted arithmetic average of the
cost of various sources of finance that have been used by it.
12. (b) weighted average
The cost of capital of a company is the weighted arithmetic average of the cost of
various sources of finance that have been used by it. Costs of equity, retained
earnings, preference capital, debentures, and term loans are first calculated and
weights are attached to them in order to calculate the weighted average cost of
capital.
D 0 1  g 
13. (d) K s  g
P0
According to the Dividend Capitalization approach, the intrinsic value of an

equity stock is equal to the sum of the present values of the dividends
associated with it. It can be written as follows:
D1
Ks =  g , where, D1 = D0 (1 + g).
P0
14. (b) Only i, iii, and iv

According to this approach, the cost of equity is reflected by the following
equation,
Ki = rf + βi (km – rf)
Where, Ki = Required rate of return on a security i
rf = Risk free rate of return
133
km = Rate of return on market portfolio.
βi = Beta of security i

Therefore, in order to calculate the rate of return on security ‘i’ according
to the capital asset pricing model, we would need risk-free rate of return,
beta of security i, and rate of return on market portfolio. The return on
investment is not required in the capital asset pricing model.
Ke
15. (c) K s 
1 f
According to the dividend capitalization approach, the cost of external

equity can be calculated as:
Ke
Ks 
1 f
where,
Ke = rate of return required by the equity investors.
f = floatation cost
Floatation costs are included in order to adjust for the issue expenses and in
case the pricing of the share in an IPO is done at less than the market value.
16. (b) Stand alone risk

Stand alone risk refers to the risk a project faces when it is considered in
isolation. Corporate risk refers to the risk a firm faces because of a project.
Systematic risk is caused by the existing market situation. It is also called
as market risk.
17. (b) scenario analysis.

In scenario analysis, different scenarios are generated and the desirability of
the project is studied in each scenario. Therefore, it is considered to be the
most suitable technique for analyzing the fate of a project in different
scenarios or market conditions.
18. (b) examines the impact of change in the net present value with changes
in one of the project variables.
Sensitivity analysis is used to find out how sensitive the results of a
particular financial model are to changes in input variables. In sensitivity
analysis, we can study the changes in the net present value with changes in
one of the variables. By understanding the affect of several factors, the
project manager estimates the possibility of achieving the project
objectives.
134
19. (c) Social cost benefit analysis
Projects affect society. Therefore, they should be studied from the point of
view of their impact on society. The project manager has to analyze the
social and economic benefits generated by the project and also the social
costs of the project. Social cost benefit analysis is a technique that assesses
the positive and negative effects of the project on society. Scenario analysis
is used if the variables that affect the project output are inter-related. This
analysis identifies combinations of inputs that lead to a change in output
values. Sensitivity analysis is used to find out how sensitive the results of a
particular financial model are to changes in input variables.
20. (c) United Nations Industrial Development Organization
The United Nations Industrial Development Organization (UNIDO) has

developed a method for measuring social costs and social benefits. As
projects affect society, they should be studied from the point of view of their
impact on society. The project manager has to analyze the social and
economic benefits generated by the project and also the social costs of the
project. Social cost benefit analysis is a technique that assesses the positive
and negative effects of a project on society and is a useful tool in selecting a
project.
21. (b) iii-v-ii-iv-i
UNIDO has developed a method for measuring social costs and social
benefits. Following are the steps involved in the method: Calculate financial
profitability at market prices, calculate net benefits at economic prices,
adjust for the project’s impact on savings and investment, adjust for the
project’s impact on income distribution, and adjust for impact of the project
on merit and demerit goods.
22. (b) percentage of profit to the capital employed.
The project manager assesses the net profitability of the project on the basis
of the market prices of all inputs and outputs. The profit is obtained by
subtracting the expenditure incurred from the firm’s revenues. The project
manager calculates the profitability of the project as the percentage of profit
to the capital employed.
23. (c) Elasticity of marginal utility of income
The elasticity of marginal utility of income is defined as the rate at which

the marginal utility of income falls with an increase in income level. The
elasticity of marginal utility of income is used by the project manager to
understand the redistribution of income. It is also used to adjust the impact
of the project on the distribution of income.
135
24. (c) Only ii and iv

The project manager uses the elasticity of marginal utility of income to
understand the redistribution of income. The elasticity of marginal utility of
income is defined as the rate at which the marginal utility of income falls
with an increase in the income level. More weight is given to low income
groups and less weight is assigned to high income groups.
25. (a) merit goods.
Merit goods are those goods whose social value is more than their economic
value. For example, petroleum products are merit goods as producing them
reduces the country’s dependence on foreign supplies. Veblen goods are
those goods whose demand is directly related to a change in the price.
Giffen goods are inferior goods, and an increase in their price would make
people buy more quantities of them.

Following are the answers to the Exercises given in the Unit.
A. Rs. 6,211.70
Investment = Rs. 2,000
Period of investment = 10 years
Rate of interest = 12% per annum
Future value of the investment after 10 years = Rs. 2,000 (1 + 0.12)10 = Rs.
6,211.70.
B. Rs. 15,110.69
mn
 r
FV = PV 1  
 m 
where,
PV = Rs. 10,000
r = nominal interest rate per annum = 14% per annum.
m = frequency of compounding during a year = 4 times a year
n = number of years for which compounding is done = 3 years
43
 0.14 
FV3 = 10,000  1   = 10,000 (1.035)12 = Rs. 15,110.69.
 4 
C. Rs. 1,113.80
0.14
Nominal rate of interest per month = = 0.01167
12
136
The initial deposit can be calculated as follows:
 1  r n  1   1  0.0116712  1 
PVAn = A  n  = 100  12 
 r 1  r    0.01167 1  0.01167 
 1.1494  1 
= 100   = Rs. 1,113.80
 0.01167 1.1494 
D. Rs. 103.79
0.09
Nominal rate of interest per month = = 0.0075
12
The initial deposit can be calculated as follows:
 n
A 1  r   1

 
PVA n  n
r 1  r 
 1  0.007560  1 
5000 = A 
60 
 0.0075 1  0.0075 
 1.5657  1 
5000 = A  
 0.0075 1.5657  
5000 = A (48.1744)
5000
A= = Rs. 103.79.
48.1744
E. 15.81%
R P
D
Kp = n
RP
2
where,
Kp = cost of preference capital
D = preference dividend per share payable annually = 15%
R = redemption price = Rs. 100
P = net amount realized per share = Rs. 95
n = maturity period = 12 years
137
R P 100  95
D 15 
Kp = n = 12 = 0.1581 = 15.81%.
RP 100  95
2 2
F. 7.5%
Cost of capital of the company = (proportion of equity  cost of equity) +

(proportion of debt  cost of debt).
 50   50 
=  6%     9%  = 7.5%.
 100   100 
G. 26%
D
Ks  1  g
P0
where,
D1 = Expected dividend = D0 (1 + g)
D0 = 15, g = Growth rate = 5%
D1= D0 (1 + g) = 15 (1 + 0.05) = 15.75
P0 = Market price
Ks = (15.75/75) + 0.05 = 0.26 or 26%.
H. 112.17%
Year Dividend per Share Price per Share Wealth

(Rs.) (Rs.) Ratio
1 10 10 -
2 10 12 2.2
3 12 14 2.167
4 13 12 1.7857
5 10 10 1.67
6 12 15 2.7
7 14 10 1.6
8 15 10 2.5
9 15 12 2.7
10 15 12 2.25
D t  Pt
Wealth ratio =
Pt - 1
138
where,
t = 1, 2,.... n.
Dt = dividend per share for year ‘t’ payable at the end of year
Pt = price per share at the end of year ‘t’
Pt-1 = price per share at the end of year ‘t-1’ (i.e., price per share at the
beginning of year ‘t’)
Wealth ratios:
W1 = 0
D 2  P2 10  12
W2 = = = 2.2
P2 - 1 10
D 3  P3 12  14
W3 = = = 2.167
P3 - 1 12
Similarly, wealth ratios for the other years can be calculated.

Average yield = (W1 x W2 x ….. x Wn)1/n – 1 = (2.2 x 2.167 x 1.7857 x 1.67
x 2.7 x 1.6 x 2.5 x 2.7 x 2.25) 1/9 – 1= (932.7744)0.11 – 1 = 2.1217 – 1 =
1.1217 = 112.17%.
I. 22.58%
Ke
Ks =
1 f
where,
Ke = rate of return required by the equity investors = 21%
f = floatation costs as a percentage of the current market price = 7%
0.21
Ks = = 0.2258 or 22.58%.
1  0.07
J. 28%
D1
Ke = g
P0
where,
D1 = Expected dividend = Rs. 10
g = Growth rate = 8%
139
P0 = Market price = Rs. 50
10
Ke =  0.08 = 0.28 or 28%.
50
K. (c) 28%
Cost of retained earnings is equal to the rate of return expected by the
equity investors. Therefore, cost of retained earnings, kr = cost of equity, ke
= 28%.
L. 10.26%
R P
I (1 T ) 
Kd = n
RP
2
where,
Kd = post-tax cost of debenture capital
I = annual interest payment per debenture capital = 15%
T = corporate tax rate = 40%
R = redemption price per debenture = Rs. 100
P = net amount realized per debenture = Rs. 95
100  95
15 (1  0.40) 
Kd = 5 = 10.26%.
100  95
2
M. 16.51%
R P
D
Kp = n
RP
2
where,
Kp = cost of preference capital
D = preference dividend per share payable annually = 12%
R = redemption price = Rs. 100
P = net amount realized per share = Rs. 80
140
100  80
12 
7 14.86
Kp = = = 0.1651 = 16.51%.
100  80 90
2
N. 16.55%
In order to calculate the weighted average cost of capital of the company,
we need the costs of various sources of finance and the weights. The costs
of various sources of finance used by the company are:
Cost of equity capital, ke = 28%
Cost of preference capital, kp = 16.51%
Cost of debentures, kd = 10.26%
Cost of retained earnings, kr = 28%
Weights for these can be calculated using the book value approach. In this,
the weight of a particular source of finance is equal to the book value of
that source divided by the total of the book values of all the sources of
finance used by the company.
That is,
100
we = = 0.2
500
100
wp = = 0.2
500
100
wd = = 0.2
500
100
wr = = 0.2
500
Therefore,
Weighted Average Cost of Capital = ke × we + kp × wp + kd × wd + kr × wr =
0.28 × 0.2 + 0.1651 × 0.2 + 0.1026 × 0.2 + 0.28 × 0.2 = 0.056 + 0.03302 +
0.02052 + 0.056 = 0.1655 = 16.55%.
O. 12.5%
Average Annual Profit

Average Rate of Return   100
Initial Investment s
Average annual profit = Rs. 25,000

141
25,000
ARR   100  12.5% .
200,000
P. 5 years
The payback period for the project will be 5 years. After 5 years, the total
of all cash flows will be equal to the initial investment:
Rs. 1 million + Rs. 2 million + Rs. 4 million + Rs. 5 million + Rs. 8 million
= Rs. 20 million.
Therefore, payback period = 5 years.
Q. Rs. 12,451
For Option 1, the NPV is:
20000 20000 15000 10000 9000
 50000     
1.07  1.072 1.07 3 1.074 1.075
= – 50,000 + 18,692 + 17,469 + 12,244 + 7,629 + 6,417 = Rs. 12,451.
R. Rs. 7,446
15000 20000 15000 10500 8000

 50000     
1.07  1.072 1.073 1.074 1.075
= – 50,000 + 14,019 + 17,469 + 12,244 + 8,010 + 5,704 = Rs. 7,446.
S. 1.2490
62,451
For Option 1, PI  = 1.2490
50,000
T. 1.149
57,446
For Option 2, PI  = 1.149
50,000
U. Rs. 1,640
Net income gains of the three groups are:
Group X = Rs. 10,000
Group Y = Rs. 9,000
Group Z = Rs. 12,000
Marginal propensity to save of the three groups is:
MPSX = 0.02
MPSY = 0.12
142
MPSz = 0.03
The impact of the project on the savings of these groups is = (10,000 

0.02) + (9,000  0.12) + (12,000  0.03) = Rs. 1,640.
V. 0.04
Net income gains of the three groups are:
Group X = Rs. 15,000
Group Y = Rs. 12,000
Group Z = Rs. 17,000
Marginal propensity to save of the three groups is:
MPSX = 0.05
MPSY = 0.10
The impact of the project on the savings of these groups is = (15,000 

0.05) + (12,000  0.10) + (17,000  MPSz)
i.e., Rs. 2,630 = (15,000  0.05) + (12,000  0.10) + (17,000  MPSz)
680
MPSz = = 0.04.
17000
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Unit 5
Project Selection
Structure
5.1 Introduction
5.2 Objectives
5.3 Criteria for Project Selection Models
5.4 Project Selection Models
5.5 Analyzing the Uncertainty of a Project
5.6 Project Proposal
5.7 Summary
5.8 Glossary
5.1 Introduction
In the previous unit, we have discussed the financial analysis of projects. In this
unit, we shall discuss project selection. Project selection is a systematic process
of choosing a project idea for implementation from the available alternative
project ideas. The project manager attempts to decide which idea to choose,
which technology to develop, and which methodology to follow in selecting a
project. The project manager has to carefully prioritize all the available options
and choose the best. A wrong choice of a project may result in ineffective use of
resources and project failure.
As project clients and management teams become more sophisticated, the focus
of a project organization is mainly on aspects such as how to choose the right
projects and how to prioritize them. Ineffective project selection is the most
common reason for the failure of many projects. It may result from ambiguity in
the framing of objectives, absence of planning, and lack of team coordination.
The project manager has to be very careful in selecting a project. He/she should
consider the objectives and policies of the organization, the availability of
resources, and the selection of the right team to take up the project.
This unit will discuss the criteria for project selection models. We will discuss
the various project selection models and then move on to discuss the ways and
techniques used to analyze the uncertainty of a project. Finally, we shall discuss
project proposal.
Project Selection
5.2 Objectives
 identify the criteria for project selection models.

 explain project selection models.
 analyze the uncertainity of a project.
 define project proposal.
5.3 Criteria for Project Selection Models

Management of change is essential for every firm to survive in the competitive
environment. Earlier, firms took up a project as part of their strategy along with
their actual operations. Today, organizations are specializing in getting and
executing the projects. Every project is important for the firm and each project
demands separate development and implementation strategies.
It is the duty of a project manager to choose those projects that guarantee returns
in the near future. Proper project selection also determines the allocation of
resources which is aimed at ensuring better returns. A rational decision making
process is essential to choose the right project.
Souder, a well-known author in the area of project management describes the
criteria to be used while choosing a project selection model. He suggests that the
project selection model should fulfill the following characteristic – realism,
capability, cost, flexibility, ease of use, and easy computerization.
5.3.1 Realism
The model considered for selection of a project should consider all the relevant
factors that influence the decision of a project manager. The model should
explicitly state the objectives of the project manager and the firm in selecting a
particular project. It should also consider the risks (technical, cost, time and
performance risks) that a project may encounter.
For example, consider a firm that has three projects in hand; Project ‘A’, Project
‘B’, and Project ‘C’. Project ‘A’ is an innovative project that improves the image
of the firm, but requires lot of capital investment. Project ‘B’ can gain
competitive edge for the firm by strengthening the capabilities of its scientists
and skilled labor. Project ‘C’ can increase the sales of the firm by adding new
features to the existing product. The project selection model should be a
common measurement system that is capable of comparing different projects.
Then the best project can be selected based on firm’s ability to execute the
project successfully.
5.3.2 Capability
The selection model that the project manager considers should be capable of
providing the optimum decision taking into consideration all the risks and
constraints involved in the project. The selection model should have the
145
capability to evaluate future project proposals based on the expected returns of

each project without subjectivity.
5.3.3 Costs
The various costs incurred in obtaining the right selection model should be kept
at minimum. The costs associated with designing a selection model include data
generation costs, data processing and storage costs. The objective here is to
identify the best selection model and optimize the costs incurred to select the
decision model based on the size of the project. Firms should also ensure that the
project costs do not exceed the benefits of the project.
5.3.4 Flexibility
The selection model should provide the desired results within the given
conditions and taking into account the firm’s interests. The model should be easy
to modify or should be capable of adjusting on its own to the changes in the
firm’s environment.
5.3.5 Ease of Use

The selection model should be convenient to implement and easy to
communicate. The model should be tested as to how best it can be used by
existing employees without further interpretation to take a decision.
5.3.6 Easy Computerization

The data should be computerized for easy storage and retrieval. Software
packages like MS Excel, Lotus 1-2-3, Quatro Pro. work like Decision Support
Systems, and assist the project manager in data analysis and decision making.
Activity: Galaxy Constructions Ltd. is involved in various projects like the

construction of domestic dwellings, commercial complexes, larger
apartments, entertainment parks, etc. As the company accepts all types of
projects, its resources are being over stretched. To its surprise, the
management has found that the company is incurring losses because of some
of its projects. So the management of Galaxy Constructions Ltd. decided to be
more cautious when selecting projects. What should be the characteristics of a
good project selection model for Galaxy Constructions?
Answer:
146
Project Selection
Check Your Progress

1. Match the following criteria for choosing a project selection model with
their respective characteristics.
i. Realism
ii. Capability
iii. Flexibility
p. This criterion states that the model should be easy to modify or should
be capable of adjusting on its own to changes in the firm’s environment.
q. This criterion states that the project selection model should consider the
technical, cost, time, and performance risks that a project may
encounter.
r. This criterion states that the selection model that the project manager
considers should be able to provide the optimum decision, taking into
consideration all the risks and constraints involved in the project.
a. i/p, ii/q, iii/r
b. i/p, ii/r, iii/q
c. i/q, ii/r, iii/p
d. i/r, ii/p, iii/q
2. _____________ is a systematic process of choosing a project idea for
implementation from among the available alternatives.
a. Project control
b. Project selection
c. Project screening
d. Project risk analysis
3. From the following, identify the criterion that was not proposed by Souder
to choose a project selection model.
a. Cost
b. Capability
c. Rigidity
d. Ease of use
4. Identify the costs that a firm might incur while designing a project selection
model.
i. Data generation costs
ii. Data processing costs
iii. Storage costs
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
147
5. Ineffective project selection is the most common reason for the failure of
many projects. This may be the outcome of
i. ambiguity in the framing of objectives.
ii. absence of planning.
iii. lack of team coordination.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
6. Which of the following statements are true regarding a project selection
model?
i. The selection model should explicitly state the intentions of the project
manager and the firm in selecting a particular project.
ii. It should have the capability to evaluate future project proposals
without subjectivity, based on the expected returns of each project.
iii. The selection model should provide the desired results within the given
conditions, taking into account the firm’s interests.
iv. It should be convenient to implement and easy to communicate.
7. Which of the following options should the project manager consider in order
to select an effective project?
i. Objectives and policies of the organization
ii. Availability of resources
iii. Number of new employees
iv. Selection of the right team to take up the project
b. Only i, ii, and iv
c. Only i, iii, and iv
d. Only ii, iii, and iv
5.4 Project Selection Models

Broadly, project selection models are of two types: numeric and non-numeric.
Numeric models use numbers as inputs and non-numeric models use discussions,
suggestions to select a project. The project manager uses either one model or a
combination of the two models, to help him select the best model, although they
148
Project Selection
do not provide a complete decision. Even though the task of selecting a project is
delegated to a specific person or team, the ultimate responsibility to choose a
right project lies with project manager.
In order to construct a project selection model, the project manager generates a
list of objectives. The list includes the goals and interests of the firm such as
improving the brand image, generating employment for certain categories of
workers, expanding the business etc. The list of objectives can also be refined by
assigning specific weights to each objective. This prioritizes the firm’s
objectives and is useful in understanding the relationship between the project’s
expected results and organizational goals. With the availability of new
technologies, the project manager can create a Decision Support System (DSS)
for evaluating and selecting a project.
5.4.1 Non-numeric Models
These models use inputs other than numerical data to select a project. These
models are constructed based on the subjective evaluation, ideas and opinions of
the project manager and the project team. Although these models seem simple to
use, they require the team to understand the practical use of these models.
Sacred Cow
In this model, the firms select projects that enjoy support of the higher officials.
For example, when a CEO of an electronics company foresees a high market
demand for Internet-ready TVs, then the firm takes up the project of developing
a television that facilitates Internet access. Here, the project is selected because
the suggestion came from a key executive in the firm and resources are provided
in accordance with the interests of the top management.
The project is considered ‘sacred’ as everyone in the firm tries to make the
project a success. These projects do not face any resource constraints generally
and they are persisted with, until a satisfactory product is delivered. Most of
these projects are successful because of the ability and experience of the key
executive who gave the project idea, and also because of the top management’s
interest in making the project a success. These projects are terminated only when
the top management is convinced that the project is a failure.
Extension of Product Line
New projects are taken up as extensions to the existing product line, in order to
fill the gaps between the market offer and customer needs. This type of project is
treated as a part of the organization’s strategy. Therefore, it is free from
establishing a selection criterion. Firms take up projects to cater to the unfulfilled
needs of the customer and to strengthen their product line.
Operating Necessity
Some projects are initiated in order to cater to the operating necessity of some
other existing projects. For example, a special project like building a dike is
necessary for operating a project that is facing a threat of inundation. Similarly,
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Election Commission of India initiates the project of issuing ‘Identity Cards’ to

new voters before taking up the project of conducting elections throughout the
country.
Competitive Necessity
The competition in the market forces the management to take up new projects.
For example, the need for computerizing in an organization arose out of
competitive necessity to provide better services to the customers and to survive
in the market. Similarly, many business schools are restructuring their courses to
stay afloat and gain competitive advantage.
Comparitive Benefit
When an organization has many projects in hand, the top management chooses
the most beneficial project. This is because of the comparative benefit that a
project has relative to other projects. Firms initiate certain projects as an attempt
to construct a portfolio that best fits the firm’s objectives and its capacity.
Q-Sort Technique
Q- Sort technique is a useful evaluation and selection technique used to prepare a

list of priority projects. According to this technique, a project manager first
collects the various project ideas and then classifies them as good, fair and poor
projects based on economic and technical feasibility, market potential,
organizational urgency, level of complexity and risks involved, organizational
needs and expected returns of the project. In the second step, the project manager
further subdivides the projects arranges them in descending order (excellent to
worst). The sorting process is continued till the project manager succeeds in
identifying the best project.
The sorting of project ideas is carried out by the project manager or by a team of
experts. When it is carried out by different individuals, there is a possibility of
deviations in assigning the ranks to the projects. But the deviations will not be
drastic as experts evaluate the projects considering the broad organizational
objectives and requirements. After sorting the project ideas, the best project is
sent for financial analysis before implementation.
Example: Q-Sort Technique

The following are the steps in Q-Sort technique:
 Collecting Ideas and Rating
In this step, the project manager prepares the list of all projects that are
chosen for selection. Each participant is given a deck of cards, with the
name and description of the project written on them. Each participant is
expected to rate the project ideas on the basis of the broad organizational
objectives.
 Dividing Ideas
Based on relative merit, the project ideas are divided into high level and
low level piles, which may not be equal in size.
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Project Selection
 Creating a Medium Level Pile

 The participants are again instructed to divide the above cards from each pile
into two groups, on the basis of relative merit. This creates a new medium
level pile that consists of less valued ideas from high level pile and high
valued ideas from the low level pile.
 Creating a Very High and Low Level Pile
From the available high level pile, ideas are again classified into very
high level and high level ideas. Similarly, the low level pile is divided
into low level and very low level pile.
 Selecting
The participants check the ideas once again to ensure the segregation of
ideas is satisfactory. With the above procedure, the project manager can
select an idea that is appreciated by most participants.
Adapted from Jack R.Meredith, Samuel J.Mantel Jr., “Project Management: A
Managerial Approach,” Fourth Edition, 2000 John Wiley & Sons, Inc, p 47.
Activity: The Deans Council of a university got a number of project

proposals from various departments requesting for grants. Madan Sarma, the
vice-chancellor of the university, wanted to use a Q-sort technique to
determine the project (s) to be taken up for the next academic year? Explain
why Sarma preferred the Q-sort technique?
Answer:
Check Your Progress

8. Which of the following is a useful evaluation and selection technique used
for preparing a list of priority projects?
a. Sacred cow
b. Q-Sort technique
c. Comparative benefit
d. Competitive necessity
9. Which of the project selection models are constructed based on subjective
evaluation, ideas, and opinions of the project manager and the project team?
a. Numeric models
b. Non-numeric models
c. Profitability models
d. Scoring models
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10. Which of the following options is not a non-numeric project selection

model?
a. Q-Sort technique
b. Profitability index
c. Sacred cow
d. Comparative benefit
11. In which of the project selection models do the firms select projects that
enjoy the support of higher officials?
a. Sacred cow
b. Competitive necessity
c. Q-Sort technique
d. Comparative benefit
5.4.2 Numeric Models
Firms depend on numeric models heavily while selecting a project. Most firms
consider the numeric models more useful than non-numeric models which are
very subjective and unscientific. Broadly, numeric models are of two types --
profit/profitability models and scoring models.
Profit/ Profitability Models
The profit/ profitability models that are followed by the project manager are --
Payback Period, Average Rate of Return (ARR), Net Present Value (NPV),
Internal rate of Return (IRR), and Profitability Index.
Payback Period: The payback period method is the simplest way of looking at
one or more major project ideas. Payback period indicates how long the project
takes to earn back the money spent on the project. The formula to find the
payback period is: Cost of Project divided by Annual Cash Inflow from Project.
If a project costs Rs.50,000 and expects to earn Rs.12,000 annually, then the
payback period of the project would be 50,000 ÷ 12,000 = 4.16 years. The
project manager selects the project with a lower payback period.
Average Rate of Return (ARR): The project manager selects the project that
gives a reasonable rate of return for the investment made. The project manager
considers the Average Rate of Return of the project before selecting it as it is a
simple way of gauging the return on an investment.
The Average Rate of Return (ARR) is calculated using the following formula:
Annual Cash Inflows - Depreciaton

Initial Investment
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Project Selection
Here, depreciation is calculated as (using the straight-line method):
Cost  Salvage Value

Useful Life
For example, an equipment costing Rs.7,500 is expected to return Rs.2,000 per

year for five years. After five years, the equipment can be sold at Rs.500.
Then the depreciation would be = (7,500 - 500) ÷ 5 = Rs.1,400 per annum.
Therefore, ARR = (2,000 – 1,400)/ 7,500 = 8%
Thus, ARR gives a quick estimate of the project’s profitability and provides a
basis for comparing several different projects.
Net Present Value (NPV): NPV is the net present value of all future cash flows
from the project. It is a method that compares the value of a rupee today with the
value of the rupee in the future. If the NPV of a project is positive, then the
project can be accepted. If the NPV for a project is negative, then it should be
rejected.
Internal rate of Return (IRR): Internal rate of return is defined as the rate that
discounts all of the cash flows of an investment to zero. It is the discount rate
which makes the NPV of a project zero. If the IRR of the project is greater than
the minimum acceptable rate of return, then the project is considered for
selection.
Profitability Index: Profitability index or cost-benefit ratio is the net present
value of all cash flows to the initial investment outlay. If the profitability index is
greater than one, then the project is profitable. If it is less than one, the project
should be rejected.
Advantages of Profit/Profitability Numeric Models

 Non-discounted models like payback period, average rate of return methods are
simple to understand and use.
 These models ensure standard and clear decision making.
 In all the above models, cash flows are calculated from readily available
accounting information
Disadvantages of Profit/Profitability Numeric Models

 Except risk, the models do not consider non-monetary factors.
 Non-discounted models like Payback Period and Average Rate of Return ignore
the time value of money and the timing of cash flows.
 Models that reduce cash flows to their present value are applicable in short-run.
 All the models are sensitive to errors in the data input and it is also difficult to
predict the behavior of these cash inflows in the nascent years of the project.
 Payback model does not consider the cash flows after the payback period. This
model cannot work on projects where the returns are high in the long- run.
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Check Your Progress

12. The ________________ can be defined as the ratio of the net present value
of all cash flows to the initial investment outlay.
a. payback period
b. profitability index
c. average rate of return
d. internal rate of return
13. Which of the following statements is not true regarding payback period?
i. The payback period method is the simplest way of looking at one or
more major project ideas.
ii. Payback period indicates how long the project takes to earn back the
money spent on it.
iii. Project managers select the projects that have a higher payback period.
iv. The payback model considers the cash flows after the payback period,
and therefore, can work on projects where the returns are high only in
the long run.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. Only iii and iv
14. _____________ is a profitability method that indicates how long the project
takes to earn back the money spent on it.
a. Profitability index
b. Payback period
c. Internal rate of return
d. Average rate of return
15. Projects that have a ___________ payback period are selected.
a. Lower
b. Negative
c. Higher
d. Positive
16. Identify the correct formula to calculate the average rate of return.
Annual cash inflows
a.
Initial investment
Cost of project
b.
Annual cash inflow from project
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Project Selection
Annual cash inflows  Depreciation

c.
Initial investment

d.
Cost of project
17. Net present value, payback period, etc., are
a. Numeric models
b. Scoring models
c. Profitability models
d. Both (a) and (c)
18. Which of the following options is not an advantage of profitability models
of project selection?
a. Profitability models are simple to understand and use.
b. Profitability models ensure clear decision making.
c. In profitability models, cash flows are calculated from readily available
accounting information.
d. Profitability models are applicable only in the short-run.
19. Which of the following is a profitability model of project selection?
a. Q-Sort technique
b. Unweighted 0-1 factor model
c. Average rate of return
d. Sacred cow
20. A project will be selected if the profitability index of the project is
a. less than 1.
b. equal to 1.
c. equal to zero.
d. more than 1.
21. Which of the following is also called the cost-benefit ratio?
a. Net present value
b. Profitability index
c. Average rate of return
d. Internal rate of return
22. ______________ is defined as the rate that discounts all the cash flows of an
investment to zero.
a. Profitability index
b. Average rate of return
c. Internal rate of return
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23. A project will be accepted if the net present value of the project is
a. lower.
b. higher.
c. negative.
d. positive.
24. Identify the correct formula to calculate the payback period.
Annual cash inflows
a.
Initial investment
Cost of project
b.
Annual cash inflows  Depreciation

c.
Initial investment

d.
Cost of project
Exercises
A. Project X requires an investment of Rs. 1,000,000. It expects to earn Rs.
200,000 per annum. Calculate the payback period of the project.
B. A machine costs Rs. 15,000 and is expected to return Rs. 5,000 per year for
5 years. Depreciation for the machine is Rs. 2,500 per year. Calculate the
approximate average rate of return on this investment.
C. A machine costs Rs. 10,000 and is expected to return Rs. 3,000 per year for
3 years. After 3 years, the machine can be sold at Rs. 4,000. Calculate the
average rate of return of the investment.
5.4.3 Scoring Models

As all the profitability models focus on a single decision criterion, the project
manager uses scoring techniques that involve multiple criterion to select a
project. In these models, decisions are arrived at by the discussions of the project
team with the top management. Some of the scoring models are discussed below.
Unweighted 0-1 Factor Model

The management first lists factors that can normally be considered in rating a
project for selection. Management constitutes a team of raters to select the
project. The people involved in the team must be familiar with goals of the
organization and the firm’s potential project portfolio. The list of factors is given
to the team of raters and the project is selected on the basis of the score given to
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Project Selection
each project idea. The evaluators rate every project idea, and the management
selects the project with the highest factor score. The advantage of using this
technique is that it gives equal weightage to the opinions of all the raters and
produces an explicit final result.
Unweighted Factor Scoring Model

The disadvantage of unweighted 0-1 Factor Model is that the raters are forced to
choose either ‘qualified’ or ‘not qualified’ for a particular factor. The
unweighted factor scoring model overcomes this limitation by constructing a
simple linear measure of scale, normally a scale from 1 to 5. The rater can
choose any values from 1 to 5, where 5 is very good, 4 is good, 3 is fair, 2 is
poor and 1 is very poor. The management can also include a factor, the expected
future profit from a particular project in the next 3 years. This makes the
management aware of the extent to which a project can be selected or rejected.
Weighted Factor Scoring Model

The two models talked about earlier are based on the assumption that every
factor that is included in the list of factors is equally important. But this
assumption is not true, and often impracticable. Therefore, the management
considers weighted factor scoring models where the factors are weighted as per
their importance. Then scoring for each factor becomes the product of the factor
weight and the factor. The sum of all the factor scores gives the project score.
The above calculation is done by using the formula,
n
S =  Fi Wi
t 0
Where, S = Project score

Fi = Factor score of factor
Wi = Weight assigned to the factor’s
n = number of factors
The Delphi technique or the brainstorming technique is used to assign weights to
each factor. Normally, weights are associated in the range of 0 to 1. The
management can also examine the degree to which the score of a project changes
for a change in the level of resources allocated.
Advantages of Numeric Scoring Models

 Consideration of weights to each factor is the most objective oriented way of
selecting a project.
 These models consider the interests of all the people involved in project
selection.
 These models reveal the exact objectives and policies of the company.
 These models are logical and follow a simple methodology.
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Disadvantages of Numeric Scoring Models

 These models assume that all the factors involved are linear and independent,
which is not practically possible.
 Project scores provide only a relative measure, but they cannot exactly reflect
the utility of the project.
Other Approaches
The project manager can use the ‘Iterative rating method’ as an alternative to
scoring models. Here, the project manager ranks all the projects based on a set of
predetermined attributes. The attributes that do not differentiate the project
alternatives are ignored. The project that satisfies the most number of attributes
is finally selected.
The model employed for selection of a project should be relevant, consistent and
sufficient. Very few project managers use mathematical programming
techniques for selection criterion and most projects are selected on the basis of
convenience. Many people prefer weighted scoring model that consider the
multiple objectives of the organization, are easy to modify in the changing
environment and are not biased.
Check Your Progress

25. Identify the project selection model in which the raters are forced to choose
whether a particular project is either qualified or not qualified.
a. The Q-Sort technique
b. The unweighted 0-1 factor model
c. The unweighted factor scoring model
d. The weighted factor scoring model
26. Identify the project selection model that overcomes the limitation of the
unweighted 0-1 factor model by constructing a simple linear measure of
scale.
c. The unweighted factor scoring model
d. The ueighted factor scoring model
27. Identify the statements that hold true with regard to the iterative rating
method.
i. The project manager ranks all the projects based on a set of
predetermined attributes.
ii. The project that satisfies the most number of attributes is finally
selected.
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Project Selection
iii. The iterative rating method is used as an alternative to the scoring

models.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
28. Which of the following is not an advantage of numeric scoring models?
a. These models are logical and follow a simple methodology.
b. These models reveal the exact objectives and policies of the company.
c. The project scores provide a relative measure and therefore, reflect the
project’s utility.
d. These models consider the interests of all the people involved in project
selection.
29. Identify the project selection model that makes use of the Delphi or
brainstorming technique to assign weights to each factor.
a. The unweighted 0-1 factor model
b. The unweighted factor scoring model
c. The weighted factor scoring model
d. Both (a) and (b)
30. Which of the following is a scoring model of project selection?
c. The sacred cow
d. Average rate of return
5.5 Analyzing the Uncertainty of a Project

Although the firms try their best to come up with the best selection criterion,
they rarely come out with a single best solution. This is because of the
uncertainty and risk involved in carrying out the project. It is true that risk is
inherent in every activity of the project and no project manager can predict the
behavior and intensity of the risk. But the objective of the project manager is to
reduce the impact of the risk on key aspects such as project cost and project
schedule. The result of a project activity largely depends on: What the project
manager does and How the business environment affects the project?
The conditions under which the decisions are made by the project manager can
be classified into three categories: risk, uncertainty, and certainty. Under risk
conditions, the project manager finds the chance of occurrence of different states
of nature and payoff value of each state of nature. The expected value is
calculated as sum of the product of payoff value and the chance of occurrence of
the state of nature.
159
In case of uncertain conditions, the chance of occurrence of each state of nature

is not known. No standard procedures are developed to make a decision under
these circumstances. Therefore, the project manager assigns subjective
probabilities to each state of nature to calculate the expected values of the
projects. Thus the uncertain problem is converted into a risk. In certain
conditions, the project manager assumes only a single state of nature (probability
1) and the expected project outcome becomes the expected value.
A majority of the decisions made in project management come under uncertain
conditions and so the project manager assumes subjective probabilities for each
state of nature to find the expected values of the projects. In case of R& D
projects where little information is available, the uncertainties include
uncertainties about timing and scheduling the project, uncertainty about the
direct outcome of the project and uncertainty of side effects of the project.
The project manager therefore tries to reduce the uncertainty by preparing
proforma documents that estimate the profit and loss of the projects. Techniques
like risk assessment, simulation analysis and window-of-opportunity analysis
provide useful information in dealing with uncertainty.
5.5.1 Risk Assessment

Risk assessment aims at measuring the level of uncertainty associated with the
various parameters considered by decision-makers. Decision making becomes
very difficult when risk is coupled with an amount of uncertainty. In such
situations, the project manager carefully estimates the probability distributions
for all the investments made to calculate the likely returns. The probability
distribution for the expected rate of return is calculated by simulation technique.
5.5.2 Simulation Analysis

Simulation is a technique of imitating the behavior of some situation or process
(whether economic, military, or mechanical) by means of a suitably analogous
situation for the purpose of studying the characteristics of the variables in the
situation. It is useful for solving a business problem where values of several
variables are not known, or partly known. This technique coupled with
sensitivity analysis gives better understanding of several project variables.
5.5.3 Window-of-Opportunity Analysis

A firm takes up a project to create a new process or a product only when it feels
that there will be reasonable returns from the success of the project. In the initial
stages of product development, a project manager is not too sure of returns the
new product or process can bring into the firm. The only thing the project
manager knows at this stage is that the product will be technically viable.
Conventionally, firms developed a product and then tested its conformity to the
purpose of its creation. But this put high investments at stake as the economic
viability of the new process or the product was not certain. Modern day project
managers are inverting the conventional way of product development and are
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Project Selection
trying to find out the cost and performance specifications that should be
achieved by the new product or process ideas before they are sent for R&D. So
the project manager visualizes a window -of- opportunity for the innovation that
would be the result of the project.
According to this analysis, the project manager analyzes the current production
process in detail and notes down all the activities that would be improved by the
added innovation. Depending on this baseline data relating to the current process
and its performance, the project manager estimates the performance of the
innovation as a fraction of the baseline system. This makes the process of project
selection easier for the project manager.
Check Your Progress

31. Identify the technique that involves imitating the behavior of some situation
or process by using a similar situation in order to study the characteristics of
the variables in the situation.
a. Risk assessment
b. Simulation analysis
c. Window-of-opportunity analysis
d. Delphi technique
32. The outcome of a project depends mostly on
i. the way the project is being carried out by the project manager.
ii. the recruitment policy of the organization.
iii. the business environment that affects the project.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
33. The conditions under which decisions are made by the project manager are
classified into three categories: risk, uncertainty, and certainty. Match these
categories with their respective characteristics.
i. Risk conditions
ii. Uncertain conditions
iii. Certain conditions
p. The project manager assumes a single state of nature.
q. The project manager finds out the chance of occurrence of different
states of nature and the payoff value of each state of nature.
r. The chance of occurrence of each state of nature is not known and no
standard procedures are developed to make a decision under these
circumstances.
a. i/p, ii/q, iii/r
b. i/r, ii/p, iii/q
161
c. i/p, ii/r, iii/q

d. i/q, ii/r, iii/p
34. Under conditions of certainty, which of the following is true with regard to
the expected value?
a. The expected value is calculated as the sum of the product of payoff
value and the chance of occurrence of the state of nature.
b. Subjective probabilities are assigned to each state of nature in order to
calculate the expected value of the project.
c. The expected project outcome becomes the expected value of the
project.
35. Identify the techniques that help in providing useful information in dealing
with uncertainty.
i. Risk assessment
ii. Simulation analysis
iii. Black box
iv. Window-of-opportunity analysis
a. Only i, ii, and iv
36. Which of the following techniques involves measuring the level of
uncertainty associated with the various parameters considered by decision
makers?
b. Risk assessment
c. Simulation analysis
d. Window-of-opportunity analysis
37. Which of the following statements is true regarding window-of-opportunity
analysis?
a. An analogous situation is used to imitate the behavior of some situation
or process for studying the characteristics of the variables in the
situation.
b. The project manager analyzes the current production process in detail
and notes down all the activities that would be improved by the added
innovation.
c. All the required and available inputs as well as the desired outputs are
listed and it is checked whether these outputs can be produced with the
available inputs.
d. This technique involves measuring the level of uncertainty associated
with the various parameters considered by decision makers.
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Project Selection
5.6 Project Proposal

Project proposal is the initial document that converts an idea or policy into
details of a potential project, including the outcomes, outputs, major risks, costs,
stakeholders and an estimate of the resourcing and time required. It is prepared
after a careful evaluation of several projects and the factors influencing each
project. A project proposal normally includes a summary statement, cover letter,
justification section, the technical description of the proposed work, budget and
key personnel involved in the project. Since the proposal is a letter aimed at
convincing the authority to commence the project, it should be prepared
carefully. Sometimes the management also asks the project manager to submit
the project proposal in order to examine the viability of the project.
Preparation of an in-house project proposal does not require much attention as
the document is prepared to send it to the top management of the firm. The
document is produced only as formality and the top management normally
accepts it. This is because the objectives, strategies, strengths, financial
constraints of the organization were already taken care of while selecting the
project. An in-house project proposal states the resource requirements of the
project team. Once the top management receives the proposal, it decides whether
the project team should proceed with the project or not. Here, the objective of the
project proposal is to mention the project requirements.
In the case of an outside agency, external sponsor or the government, the
proposal should be properly documented. It is also the project manager’s
responsibility to check if the outside customer can pay for the project being
proposed. During the 1980s, several European engineering companies initiated
several projects in Iraq, but payments were not made because of the hostilities
that broke out later. A proper project proposal plays a crucial role in getting the
project approved.
The proposal document should be simple, precise and well-structured. Generally,
it starts with an executive summary statement that describes the nature of the
project being proposed, to the concerned authority. This statement should not be
too technical to understand and it should describe scope of the project. The
summary statement is followed by a cover letter, which acts as a key marketing
document.
Before sending the proposal to the outside funder/agency, the following
questions have to be answered.
 Which projects are to be chosen?
 How to organize the proposal documentation process?
 What strategy to be used in setting the bidding price?
 How much time and costs can be spent for preparing the proposal document?
 Every project proposal deals with four issues, namely:
 Technical nature of the project
 Plan of implementation
163
 Plan of administration and logistics

 Description of the group
5.6.1 Technical Nature of the Project
The major subsystems of the project and the organization’s approach to each
subsystem should be noted down for complex projects. The techniques to meet the
special technical requirements of the client should be clearly stated in the project
proposal.
5.6.2 Plan of Implementation
This part of the project proposal provides the estimates of the schedule, costs,
materials used for each major subsystem. Costs and time are then aggregated to
estimate the total cost and duration of the project. Gantt Charts, Critical Path
Method (CPM), Program Evaluation and Review Technique (PERT) are used to
present the plan of implementation for each major subsystem. The major phases of
the project and their estimated completion time are also provided to check the pace
of implementation.
5.6.3 Plan of Administration and Logistics
The proposal provides a detailed description of how all the needed equipment,
and routing facilities are arranged. It also describes the administration
procedures of all the departments, the method of transportation of raw materials,
performance measurement of subcontractors, conduction of internal and external
audits, and quality checks. This section should also cover in detail how change
orders are to be handled.
5.6.4 Description of the Group
A detailed list of the key project employees, their qualifications, their job
descriptions and their experience is provided in the description of the group’
section of the proposal. The proposal should convince the outside agency or the
sponsor that the project team is capable of executing the project. In case of
internal projects, the names and designations of all project members is enough.
Example: General Rules for Project Selection

No single technique is sufficient to select a project. Following are some
useful rules to make better choices.
Rule 1: Be explicit about what is important in choosing projects
The process of selection should be based on well defined selection criteria.
The project manager should not be distracted by what an organization can
pursue – rather, he should focus on what the organization needs to pursue.
Rule 2: Identify explicit procedures and stick to them
The project manager should develop a clear cut approach to select a project
and strictly adhere to it. The project manager should monitor the performance
of the key members to ensure exact implementation of the decisions taken.
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Project Selection
Rule 3: Be ready to challenge all assertions

The project manager should be prepared to face risks in any form they might
arise. No activity results in profit unless there is an effort.
Rule 4: Constitute a good project selection team
An ideal team should be made up of individuals who represent the broad
areas of project management like engineering, product development, finance
and marketing.
Rule 5: Involve key project personnel in the selection of a project
Key project personnel should be involved while selecting a project, as they
can better understand the rationale behind executing the project.
Adapted from J.Davidson Frame, "The New Project Management," Jossey-Bass
publishers, San Francisco, p.191-192.
Activity: Mohan Manufacturers Ltd., manufactures machine tools that can be

used in different equipment and machinery. Recently, the firm's management
wanted to take up a plant expansion project to meet the growing demand for a
variety of machine tools. Kishan Enterprises wanted to bid for this expansion
project. The managing director of Kishan Enterprises, Kumar Chandani,
asked Ranga Chary, a senior manager of the company, to prepare a project
proposal to be sent to Mohan Manufacturers Ltd. What is a project proposal?
How can Ranga Chary prepare it?
Answer:
Check Your Progress

38. Which of the following issues are dealt with in any project proposal?
i. The technical nature of the project
ii. The plan of implementation
iii. The plan of administration and logistics
iv. A description of the project team
165
39. Which of the following options is the initial document that converts an idea
or policy into details of a potential project, including the outcomes, outputs,
major risks, costs, stakeholders, and an estimate of the resources and time
required?
a. Project plan
b. Project status report
c. Project proposal
d. Project progress report
40. In the project proposal, which of the following sections discusses the
conduct of internal and external audits and quality checks?
a. Plan of implementation
b. Plan of administration and logistics
c. Technical nature of the project
d. Both (b) and (c)
41. Identify the techniques that are used to prepare a plan of implementation for
each major subsystem of the project.
i. Gantt charts
ii. Nominal group technique
iii. Critical path method
iv. Program evaluation and review technique
5.7 Summary
 Project selection is a systematic process of choosing a project idea for
implementation from the available alternative project ideas. The project
manager attempts to decide which idea to choose, which technology to develop,
and which methodology to follow in selecting a project.
 Project selection models are broadly of two types: numeric and non-numeric.
 Numeric models use numbers as inputs and non-numeric models use
discussions, suggestions to select a project.
 Non-numeric models use inputs other than numerical data to select a project.
These models are constructed based on the subjective evaluation, ideas and
opinions of the project manager and the project team.
 The project selection model should fulfill the following characteristic – realism,
capability, cost, flexibility, ease of use, and easy computerization.
166
Project Selection
 The conditions under which the decisions are made by the project manager can
be classified into three categories: risk, uncertainty, and certainty.
 A majority of the decisions made in project management come under uncertain
conditions, and so the project manager assumes subjective probabilities for each
state of nature to find the expected values of the projects.
 The project manager tries to reduce the uncertainty of a project by preparing
proforma documents that estimate the profit and loss of the projects. Techniques
like risk assessment, simulation analysis and window-of-opportunity analysis
provide useful information in dealing with uncertainty.
 Project proposal is the initial document that converts an idea or policy into
stakeholders and an estimate of the resourcing and time required. It is prepared
after a careful evaluation of several projects and the factors influencing each
project.
5.8 Glossary
 Average Rate of Return (or accounting rate of return): Method used to
measure the relationship between the average annual profits earned by a project
and the investments made in it.
 Internal Rate of Return: The discount rate at which the present values of cash
outflows and cash inflows are equal.
 Net Present Value: It is the net present value of all future cash flows from the
project. It is a method that compares the value of a rupee today with the value of
the rupee in the future.
 Non-numeric Selection Models: A project selection model that uses inputs
other than the numerical data to select a project. The model uses discussions,
suggestions to select a project.
 Numeric Selection Model: A project selection model that uses numbers as
inputs to select a project.
 Payback Period: The time period during which a firm can recover the
investments it has made in a project.
 Profitability Index (or benefit-cost ratio): The ratio of future cash benefits to
the initial outflows is called as profitability index.
 Project Proposal: An initial document that converts an idea or policy into
stakeholders and an estimate of the resources and time required.
 Project Selection: A systematic process of choosing a project idea for
implementation from the available alternative project ideas.
 Q-Sort Technique: A project evaluation and selection technique used to
prepare a list of priority projects.
 Simulation: It involves imitating the behavior of some situation or process by
using a similar situation in order to study the characteristics of the variables in
the situation. It can also be defined as the method of solving decision-making
problems by designing, constructing, and operating a model of the real system.
167

1. The project manager should chose those projects that guarantee returns in
the near future with the help of a proper project selection model. What are
the characteristics that the project manager should look out for while
choosing a project selection model?
2. The responsibility to choose a right project lies only with the project
manager. So, the project manager studies various project selection models to
choose the right project. What are the basic project selection models?
Explain the significance of these models in choosing the project.
3. Though firms come up with the best selection criterion, they rarely come out
with a single best solution due to the uncertainty and risk involved in
carrying out the project. In what ways can the project manager deal with the
uncertainty involved ina project?
4. The management may sometimes ask a project manager to submit a project
proposal to examine the viability of the project. What is a project proposal?
Explain the aspects that are covered in a project proposal.


unit.
1. (c) i/q, ii/r, iii/p
The model considered for selection of a project should consider all the
relevant factors that influence the decision of a project manager. It should
also consider the risks (technical, cost, time and performance risks) that the
project may encounter. The selection model that the project manager
considers should be able to help in arriving at the optimum decision taking
into consideration all the risks and constraints involved in the project. The
model should be easy to modify or should be capable of adjusting on its own
to changes in the firm’s environment.
168
Project Selection
2. (b) Project selection

Project selection is a systematic process of choosing a project idea for
implementation from among the available alternatives. The project manager
has to be very careful in selecting the project. He/she should consider the
objectives and policies of the organization, the availability of resources, and
the selection of the right team to take up the project. Project control is the
process of collecting information related to the performance of the project
system, comparing it with the desired level of performance, and taking
corrective action to decrease the gap between the actual and the desired
performance levels. Project risk analysis is the analysis of the probability of
certain undesirable events happening, and their impact on achieving the
project objectives. After the ideas have been collected, the project manager
has to screen them. The objective of screening is to drop the poor ideas at
the initial stages of new project development. It is a process of rejection
rather than a process of selection. Screening helps in rejecting the ideas that
cannot be considered for implementation.
3. (c) Rigidity
Souder described the criteria to be used while choosing a project selection
model. He suggested that the project selection model should fulfill the
following characteristics: realism, capability, minimum cost, flexibility, ease
of use, and ease of computerization. The selection model should be flexible.
It should be easy to modify or should be capable of adjusting on its own to
the changes in the firm’s environment.
The various costs incurred on obtaining the right selection model should be
kept to a minimum. The costs associated with designing a selection model
include data generation costs, data processing costs, and storage costs. The
objective here is to identify the best selection model and optimize the costs
incurred to select the decision model based on the size of the project. Firms
should also ensure that the project costs do not exceed the revenues of the
project.
Ineffective project selection is the most common reason for the failure of
many projects. This may occur due to ambiguity in the framing of
objectives, absence of planning, and a lack of team coordination. The
project manager has to be very careful in selecting a project.
Souder suggested that the project selection model should fulfill the
following characteristics -- realism, capability, minimum cost, flexibility,
ease of use, and ease of computerization. According to Souder, the selection
model should explicitly state the intentions of the project manager and the
169
firm in selecting a particular project; it should have the capability to

evaluate future project proposals without subjectivity, based on the expected
returns of each project; it should provide the desired results within the given
conditions, taking into account the firm’s interests; and it should be
convenient to implement and easy to communicate.
7. (b) i, ii, and iv
The project manager has to be very careful in selecting a project. He/she
should consider the objectives and policies of the organization, the
availability of resources, and the selection of the right team to take up the
project. While selecting a project, the project manager need not consider the
number of new employees who have joined the organization.
8. (b) Q-Sort technique
The Q-Sort technique is a useful evaluation and selection technique for
preparing a list of priority projects. A project manager collects the various
project ideas and then classifies them as good, fair, or poor. The projects are
then further subdivided and arranged in descending order (excellent to
worst). The sorting process is continued till the project manager succeeds in
identifying the best project. After sorting the project ideas, the best project is
sent for financial analysis before implementation.
9. (b) Non-numeric models
Non-numeric models use inputs other than numerical data, like discussions
and suggestions, to select a project. These models are constructed based on
the subjective evaluation, ideas, and opinions of the project manager and the
project team. Numeric models use numbers as inputs and non-numeric
models use discussions and suggestions to select a project. Numeric models
are broadly divided into two types, namely profit/profitability models and
scoring models. Net present value, average rate of return, internal rate of
return, etc., are profitability models. The unweighted 0-1 factor model, the
unweighted factor scoring model, and the weighted factor scoring are
scoring models.
10. (b) Profitability index

Non-numeric models use inputs other than numerical data to select a project.
These models are constructed based on the subjective evaluation, ideas, and
opinions of the project manager and the project team. The non-numeric
models are sacred cow, extension of product line, operating necessity,
competitive necessity, comparative benefit, and the Q-Sort technique. The
Q-Sort technique is a useful evaluation and selection technique used to
prepare a list of priority projects. In the sacred cow model, firms select
projects that enjoy the support of higher officials. In the comparative benefit
model, organizations have many projects in hand and the top management
chooses the most beneficial one from among these.
170
Project Selection
11. (a) Sacred cow

In the sacred cow model, firms select the project that enjoys the support of
higher officials. The project is selected because the suggestion came from
the top management of the firm and resources are provided in accordance
with their interests. The project is considered ‘sacred’ as everyone in the
firm tries to make the project a success.
12. (b) profitability index
The profitability index or cost-benefit ratio is the net present value of all
cash flows to the initial investment outlay. If the profitability index is
greater than one, then the project is profitable. If it is less than one, the
project should be rejected.
13. (d) Only iii and iv
Payback period indicates how long the project takes to earn back the money
spent on it. Project managers select projects that have a lower payback
period. The payback model does not consider the cash flows after the
payback period. Therefore, this method cannot work on projects where the
returns are high only in the long run.
14. (b) Payback period
The payback period method is the simplest way of looking at one or more
major project ideas. Payback period indicates how long the project takes to
earn back the money spent on it. Profitability index or cost-benefit ratio is
the net present value of all cash flows to the initial investment outlay.
Internal rate of return is defined as the rate that discounts all cash flows of
an investment to zero. In average rate of return, the project manager selects
the project that gives a reasonable rate of return for the investment made.
15. (a) lower
earn back the money spent on it. Project managers select the projects that
have a lower payback period.
Annual cash inflows  Depreciati on
16. (c)
Initial investment
The project manager selects the project that gives a reasonable rate of return
for the investment made. The average rate of return method is simple to
calculate as it uses readily available accounting information. A quick
decision can be taken by comparing the average rate of return values of
various projects.
Annual Cash Inflows - Depreciaton
Average Rate of Return (ARR) =
Initial Investment

Depreciation using the straight-line method =
Useful Life
171

Numeric models make use of numbers as inputs. Numeric models are
broadly of two types --profit/profitability models and scoring models. The
various profit/profitability models are payback period, average rate of
return, net present value, internal rate of return, and profitability index.
18. (d) Profitability models are applicable in the short-run.
Profitability models reduce cash flows to their present value. These models
are simple to understand and use, and ensure clear decision making.
However, these models are applicable only in the short-run.
19. (c) Average rate of return
The profit/profitability models that a project manager follows are payback
period, average rate of return, internal rate of return, net present value, and
profitability index.
20. (d) more than 1.
21. (b) Profitability index
22. (c) Internal rate of return
Internal rate of return (IRR) is defined as the rate that discounts all the cash
flows of an investment to zero. It is the discount rate which makes the NPV
of a project zero. If the IRR of the project is greater than the minimum
acceptable rate of return, then the project is considered for selection.
23. (d) positive.
If the NPV of a project is positive, then the project can be accepted. If the
NPV is negative, then the project should be rejected.
Cost of project
24. (b)
earn back the money spent on it. The formula to find the payback period is
Cost of project
.
172
Project Selection
25. (b) The unweighted 0-1 factor model

In the unweighted 0-1 factor model, the management lists factors that are
normally considered in rating a project for selection. The management then
constitutes a team of raters who are familiar with the goals of the organization
and the firm’s potential project portfolio to select the project. The list of
factors is given to the team of raters and the project is selected based on the
score given to each project idea. The disadvantage with this method is that the
raters can only rate a particular project as qualified or not qualified.
26. (b) The unweighted factor scoring model
The disadvantage with the unweighted 0-1 factor model is that the raters can
only rate a particular factor as ‘qualified’ or ‘not qualified’. The unweighted
factor scoring model overcomes this drawback by constructing a simple
linear measure of scale, normally a scale from 1 to 5. This scale enables the
management to be aware of the degree to which a project qualifies or does
not qualify.
The iterative rating method is used as an alternative to the scoring models.
In this method, the project manager ranks all the projects based on a set of
predetermined attributes. The attributes that do not differentiate among the
project alternatives are ignored. The project that satisfies the most number
of attributes is finally selected.
28. (c) The project scores provide a relative measure and therefore, reflect
the project’s utility.
Project scores provide only a relative measure. Such scores cannot exactly
reflect the utility of the project. The other options are all advantages of numeric
scoring models.
29. (c) The weighted factor scoring model
In the weighted factor scoring model, the factors are weighted as per their
importance. Then scoring for each factor becomes the product of the factor
weight and the factor. The sum of all the factor scores gives the project
score. The Delphi or brainstorming technique is used to assign weights to
each factor. Weights are usually associated in the range of 0 to 1.
30. (b) The unweighted 0-1 factor model
Scoring techniques involve multiple criteria to select a project. In this
model, decisions are arrived at after discussions between the project team
and the top management. Some of the scoring models are the unweighted 0-
1 factor model, the unweighted factor scoring model, and the weighted
factor scoring model. Q- Sort technique is a useful evaluation and selection
technique used to prepare a list of priority projects. In the sacred cow model,
firms select projects that enjoy the support of higher officials. In average
rate of return, the project manager selects the project that gives a reasonable
rate of return for the investment made.
173
31. (b) Simulation analysis

Techniques like risk assessment, simulation analysis, and window-of-
opportunity analysis provide useful information in dealing with uncertainty.
Simulation involves imitating the behavior of some situation or process
(whether economic, military, or mechanical) by means of a suitably
analogous situation for the purpose of studying the characteristics of the
variables in the situation. The Delphi technique is used to enhance the
creativity of a group.
The result of a project activity depends largely on what the project manager
does (the way the project is being carried out), and on how the business
environment affects the project. It does not depend on the recruitment policy
of the organization.
33. (d) i/q, ii/r, iii/p
Under risk conditions, the project manager finds out the chance of
occurrence of various states of nature and the payoff value of each state of
nature. Under uncertain conditions, the chance of occurrence of each state of
nature is not known. No standard procedures are developed to take a
decision under these circumstances. Under certain conditions, the project
manager assumes only a single state of nature (probability 1) and the
expected project outcome becomes the expected value.
34. (c) The expected project outcome becomes the expected value of the
project.
Under conditions of certainty, the expected project outcome becomes the
expected value of the project. Under conditions of risk, the expected value is
calculated as the sum of the product of the payoff value and the chance of
occurrence of the state of nature. Under conditions of uncertainty, subjective
probabilities are assigned to each state of nature in order to calculate the
expected value of the project.
35. (a) Only i, ii, and iv
Black box is a technique used to enhance the creativity of an individual. In
the black box technique, all the required and available inputs as well as the
desired outputs are listed. It is also checked whether these outputs can be
produced by using the available inputs.
36. (b) Risk assessment
Risk assessment aims at measuring the level of uncertainty associated with
the various parameters considered by the decision makers. Decision making
becomes very difficult when risk is coupled with an amount of uncertainty.
174
Project Selection
In such situations, the project manager carefully estimates the probability

distributions for all the investments made to calculate the likely returns. The
probability distribution for the expected rate of return is calculated by the
simulation technique. Attribute listing is a technique used to enhance the
creativity in an individual.
37. (b) The project manager analyzes the current production process in
detail and notes down all the activities that would be improved by the
added innovation.
According to the window-of-opportunity analysis, the project manager
analyzes the current production process in detail and notes down all the
activities that would be improved by the added innovation. Option ‘a’
discusses about simulation analysis; option ‘c’ discusses about black box, a
technique used for enhancing individual creativity; and option ‘d’ discusses
risk assessment.
A project proposal is an initial document that converts an idea or policy into
details of a potential project, including the outcomes, outputs, major risks,
costs, stakeholders, and an estimate of the resources and time required.
Every project proposal deals with four issues, namely the technical nature of
the project, the plan of implementation, the plan of administration and
logistics, and a description of the group.
39. (c) Project proposal
A project proposal is an initial document that converts an idea or policy into
the details of a potential project, including the outcomes, outputs, major
risks, costs, stakeholders, and an estimate of the resources and time required.
A project plan is a formal, approved document used to manage and control
project execution. A project status report is a report mentioning the status of
achievements and deviations from the resources that are spent and the plans
that are scheduled. A project progress report is a formal statement that gives
a comparison between the accomplishments achieved as the project
progresses and the project plan.
40. (b) Plan of administration and logistics
The plan of administration and logistics in the project proposal provides a
detailed description of how all the needed equipment and routing facilities
are arranged. It also describes the administration procedures of all the
departments, the method of transportation of raw materials, performance
measurement of subcontractors, conduct of internal and external audits, and
quality checks.
41. (b) Only i, iii, and iv
Gantt Charts, Critical Path Method (CPM), and Program Evaluation and
Review Technique (PERT) are the techniques used to prepare a plan for
implementation. Gantt charts display graphically the use of resources
(machines, tanks, pipes, operators, products) over a period of time. CPM is
175
used to predict the project duration by finding out which sequence of

activities has the least amount of scheduling flexibility. PERT is used for
planning and scheduling projects so that all the activities are completed in
the shortest possible time. The nominal group technique is used to enhance
creativity in groups.

Following are the answers to the exercises given in the unit.
A. 5 years
Cost of the project = Rs. 1,000,000
Annual cash inflow from project = Rs. 200,000
Cost of project 1,000,000

Payback period = = = 5 years
Annual cash inflow from project 200,000
B. 17%
Depreciation = Rs. 2,500 per annum.
Annual cash inflows = Rs. 5,000
Annual Cash Inflows - Depreciation

Initial Investment
5,000 - 2,500
ARR = = 16.67% = 17% (approximately)
15,000
C. 10%
Cost = Rs. 10,000
Salvage value = Rs. 4,000
Useful life = 3 years

Depreciation =
Useful Life
1 0, 000  4 ,000
= = Rs. 2,000 per annum.
3
Annual cash inflows = Rs. 3,000
Annual Cash Inflows - Depreciation

Initial Investment
3,000 - 2,000
ARR = = 10%.
10,000
176
Project & Operations Management
Course Components
BLOCK I Project Management – An Overview
Unit 1 Introduction to Project Management
Unit 2 Project Idea Generation and Screening
Unit 3 Market and Technical Analysis of Projects
Unit 4 Financial Analysis of Projects
Unit 5 Project Selection
BLOCK II Project Planning and Control
Unit 6 Management of Project Scope
Unit 7 Identifying Project Activities
Unit 8 Activities: Sequencing, Estimating Duration, and Scheduling
Unit 9 Project Review
Unit 10 Project Control
BLOCK III Project Implementation and Closing
Unit 11 Project Cost Management
Unit 12 Project Risk Management
Unit 13 Project Quality Management
Unit 14 Project Auditing
Unit 15 Project Closing
BLOCK IV Introduction to Operations Management
Unit 16 Operations Management and Operations Strategy
Unit 17 Forecasting Demand
Unit 18 Allocating Resources to Strategic Alternatives
Unit 19 Design of Production Processes
BLOCK V Design of Facilities and Operations Planning
Unit 20 Facility Location and Layout
Unit 21 Aggregate Planning and Capacity Planning
Unit 22 Fundamentals of Inventory Control
Unit 23 Purchase Management
Unit 24 Materials Management
BLOCK VI Operations Control
Unit 25 Operations Scheduling
Unit 26 Enterprise Resource Planning
Unit 27 Supply Chain Management
Unit 28 Just-In-Time (JIT) Manufacturing System
Unit 29 Productivity and Quality Management
Unit 30 Facilities and Maintenance Management
BLOCK VII Current Trends in Operations Management
Unit 31 Trends in Operations Technology
Unit 32 Globalization and Operations Management
Unit 33 Sustainability and Operations Management

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Block-I

Ref. No. POPIFHE – 082014 B1

Timely and proper implementation of project and operations management

The first unit, Introduction to Project Management, discusses the definitions of a

1.3 Definition of Project

Check Your Progress

1.4 Project Characteristics

1.4.1 Unique Activities

1.4.2 Attainment of a Specific Goal

1.4.3 Sequence of Activities

1.4.4 Specified Time

1.4.5 Interrelated Activities

making a building plan, landscaping, constructing the building, designing the

1.5 Project Parameters

The primary aim of a project is to deliver a product and/or service to a client

Check Your Progress

a. Only i, ii, and iii

1.6 Relationship between Project Parameters

1.7 Classification of Projects

Projects can be classified based on their characteristics such as business value,

Activity: Madurai Textiles is one of the leading manufacturers and exporters

1.8 Definition of a Program

According to PMI’s PMBOK, “A program is a group of projects managed in a

1.9 Project Management

Project management is a system of procedures, practices, technologies, and

Check Your Progress

1.10 Project Management – Relationship with Other Management

1.11 Relationship between Project Management and Line

are controlled by the line managers or functional managers. Therefore, the

Check Your Progress

iii. Claiming sole credit for the success of the project

1.12 Project Stakeholders

According to the Project Management Institute’s (PMI) Guide to the Project

1.12.1 Types of Stakeholders

The major stakeholders of any project include project manager, customers,

The project manager is an important stakeholder of the project as he is

 Ensuring the overall success of the project

 Acting as a catalyst for resolving project problems and conflicts

Project team members

Activity: Sitcon Limited, a popular construction company in India, secured the

Check Your Progress

17. Intermediate customers to a project are _____________.

1.13 Organizational Influences

1.13.1 Organizational Systems

1.13.2 Organizational Culture and Style

1.13.3 Organizational Structure

Example: Impact of Organization Structure on the Project Manager

Selecting the right organizational structure will provide a competitive

Authority: The type of organizational structure existing in a firm may favor

Communication: Communication plays a major role in the success of a

Priority: Multiple projects often compete for the limited resources of an

Focus: In project-oriented organizations, projects are in focus as they play a

Project-oriented organizations make it easy to run projects because their

Check Your Progress

1.14 Socio-economic Influences

1.14.1 Standards and Regulations

1.15 Environmental and Legal Influences

1.15.1 Safety Focus in Project Management:

landscape followed by connected mobility. All these developments influence the