Chapter Two: Project Identification and Preliminary Studies

2.1 Sources of project ideas

2.2 Opportunity studies
2.3 Pre-feasibility studies and preliminary selections
2.1. What is project Cycle?
The way in which projects are planned and carried out follows a sequence that has become
known as the project cycle. The cycle starts with the identification of an idea and develops
that idea into a working plan that can be implemented and evaluated. Ideas are identified in
the context of an agreed strategy. It provides a structure to ensure that stakeholders are
consulted and relevant information is available, so that informed decisions can be made at
key stages in the life of a project.
The project cycle considers various stages in which each stage not only is grown out of the
proceeding one/those that are under way/but also leads into the subsequent ones. The
planning process does not contain such a stringent sequence of events since all the aspects of
the project have to be considered simultaneously and, if necessary, adjusted to one another.
Therefore, a project cycle is a self-renewing cycle in that new projects may grow out of the
old ones in a continuous process and self-sustaining cycle of activity.

These processes can usefully be considered as a comprehensive sequence in the sense that for
the project that is implemented, each stage naturally follows the proceeding one and leads on
to the next. Actually, the division into stages is artificial; but it helps us to understand that
project planning, though a continuous process over time, has distinct phases and stages. And
therefore, throughout the project cycle, the primary preoccupation of the analyst is to
consider alternatives, evaluate them, and to make decisions as to which of them should be
advanced to the next stage in the planning process.

Regarding the classification of the aspects for the purpose of project analysis, there are many
equally valid ways in which the project cycle may be divided and the identifiable stages may
be described. There are alternative models that deal with the project cycle. However, in this
text, and exclusively in this chapter, more emphasis will be given to the two basic Models
that are widely accepted as a model of project by institutions, analysts, and mostly dealt in
academic literatures. These are: “The Baum Cycle (also called the World Bank Project
Cycle)” and “The UNIDO Project Cycle”. In addition to these two, a third model
developed by Development projects Studies Authority in Ethiopia (called “The DEPSAs
Model”), which is more or less identical with the UNIDO cycle, will be briefly discussed.
2.2. World Bank’s Project Cycle
A project with the characteristic already outlined above typically run through at least several
separable stages of activities that can be thought of as constituting a definite sequence, which
some writers and institutions have called “a project cycle”. In this regard, the first basic
model of a project cycle developed by Warren. C. Baum in 1970 was by then adopted by the
World Bank as a project cycle. Initially, this model had recognized only four main stages in
the project cycle, namely:

 Identification
 Preparation
 Appraisal and Selection
 Implementation
Later in 1978, the author has added additional two stages called “Negotiation” and
“Evaluation”. In this version of the Baum model, negotiation comes after projects pass the
appraisal process and become a candidate for realization. It is after appropriate negotiations
that projects become implementation entity. And then, projects that are implemented will be
the concern for evaluation, which usually closes the cycle as it gives rise to the identification
of new projects. This model, therefore, includes a total of six identifiable stages in the project
cycle. The World Bank accepted the amendment and hence, this new version has been in use
since then. Thus, each of Baum’s main stages is discussed briefly below:

1. Identification :
The first stage in the project cycle and in the planning process is to find potential projects.
The sources of projects may be one or more of the following:

 Some may be “resource based” and stem from the opportunity to make profitable
use of available resources.
 Some projects may be “market based” arising from an identified demand in home or
overseas markets.
 Others may be “need-based” where the purpose is to try to make available to all
people in an area of minimal amounts of certain basic material requirements and
services.
 Well-informed “technical specialists” and “local leaders” are also common sources
of projects. Technical specialists could identify many areas where they feel new
 investments might be profitable, while local leaders may have suggestions about
where investments might be carried out.
 Ideas for new projects also come from “proposals to extend and/or expand existing
programs and projects” as well as from identifying technological alternatives.
In general, most projects start as an elementary idea. Eventually, some simple ideas are
elaborated into a form to which the title “project” can be formally applied.

2. Preparation:
Once projects have been identified, there begins a process of progressively more detailed
preparation and analysis of project plans. At this stage, the project is being seriously
considered as a definite investment action. Project preparation,(also called project
formulation), involves pre-feasibility and feasibility studies and covers the establishment of
commercial, technical, institutional, financial, and socio-economic feasibility. Decisions have
to be made on the scope of the project, location and site, soil and hydrological requirements,
project size (farm or factory size), etc.

Resource based investigations are undertaken and alternative forms of projects are explored.
Complete technical specifications of distinct proposals accompanied by full details of
financial and economic costs and benefits are the outcome of the project preparation stage.
The project now exists as a set of tangible proposals. Practically, project design and
formulation is an area in which local and international consultants are very active, especially
for big projects that cover large areas and have big budgets.

3. Appraisal and Selection:

After a project has been prepared, it is generally appropriate for a critical review or to
conduct an independent appraisal. This provides an opportunity to re-examine every aspect of
the project plan and determine whether the proposal is appropriate and sound or not before
large sums are committed. Generally, internal government staffs only are used for this work
and not consultants and projects are appraised both in the field and at the desk level.
Appraisals should cover at least seven aspects of a project, each of which must have been
given special consideration during the project preparation phase:

a. Technical: here the appraisers concentrate in verifying whether what is proposed will
work in the way suggested or not.
 b. Financial: the appraisers try to see if the requirements of money needed by the
project have been calculated properly, their sources are all identified, and reasonable
plans for their repayment are made where necessary.
c. Commercial: the way the necessary inputs for the project are conceived to be
supplied is examined and the arrangements for the disposal of the products are
verified.
d. Incentive: the appraisers see to it whether things are arranged in such a way that all
those whose participation is required will find it in their interest to take part in the
project, at least to the extent envisaged in the plan.
e. Economic: the appraisers here try to see whether what is proposed is good from the
viewpoint of the national economic development interest, all project effects (positive
as well as negative) are taken into account, and check if all are correctly valued.
f. Managerial: this aspect of the appraisal examines if the capacity exists for operating
the project and see if those responsible ones can operate it satisfactorily. Moreover, it
tries to see if the responsible are given sufficient power and scope to do what is
required.
g. Organizational: the appraisers examine the project it is organized internally and
externally into units, contract, policy, institution, etc so as to allow the proposals to be
carried out properly and to allow for change as the project develops.
The appraisal process builds on the project plan but may involve new information if the
appraisal team feels that some of the data used at preparation or some assumptions are faulty.
The implications of the project on the society and the environment are also more thoroughly
investigated and documented. Similarly, the technical design, financial measures, commercial
aspects, incentives, and economic parameters are thoroughly scrutinized. These issues are the
subjects of specialized appraisal report. On the basis of an appraisal report, decisions are
made about whether to go ahead with the project or not. The appraisal may also change the
project plan or develop a new plan, that is, comment made at the appraisal stage frequently
give rise to alternations in the project plan (project appraisal).

After appraisal, the viable project proposals are chosen for implementation on the basis of the
priorities of the stakeholders and the available resources. For instance, Treasury may impose
a ceiling on the ministries with a big portfolio of investments, calling for prioritization of the
core and lower priority projects. In practice, there can be quite a sequence of project selection
decisions. Following appraisal, some projects may be discarded. If the project involves loan
finance, the lender will almost certainly wish to carry out its own appraisal before completing
negotiations with the borrower.

4. Negotiation and Financing :

Once the project to be implemented is agreed on, for donor funded projects, discussions are
held on funding and associated aspects of funding such as conditions for grants, repayment
period, interest rates on loans, flow of funds, contributions from stakeholders, and whether
there is co-financing or not. This culminates into an “Agreement Document” for the project,
which binds all the parties involved during implementation of the project.

5. Implementation:
The objective of any effort in project planning and analysis clearly is to have a project that
can be implemented to the benefit of the society. Thus, implementation is, perhaps, the most
important part of the project cycle. In this stage, funds are actually disbursed to get the
project started and keep running. A major priority during this stage is to ensure that the
project is carried out in the way and within the period that was planned. Problems frequently
occur when the economic and financial environment at implementation differs from the
situation expected during appraisal.

Frequently, original proposals are modified, though usually only with difficulty, because of
the need to get agreement between the parties involved. It is during implementation that
many of the real problems of projects are first identified. Because of this, the feedback effects
on the discovery and design of new projects and also the deficiencies in the capabilities of the
project actor can be revealed. Therefore, to allow the management to become aware of the
difficulties that might arise, recording, monitoring, and progress reporting are important
activities during the implementation stage.

Some of the aspects of implementation that are of particular relevance to project planning and
analysis are the following:

 The first is that, the better and more realistic a project plan is, the more likely
it is that the plan can be carried out and the expected benefits realized.
 The second is that, project implementation must be flexible. Circumstances
will change and project managers must be able to respond intelligently to these
changes. The common ones are: technical changes (soils, water logging, and
nitrogen application); price changes; economic policy and environmental
 changes; political changes, etc. and these all will alter the ways in which
projects should be implemented.
6. Evaluation:
The final phase in the project cycle is evaluation. Once a project has been carried out, it is
often useful, (though not always done), to look back over what took place, to compare
actual progress with the plans, and to judge whether the decisions and actions taken were
responsible and useful. The extent to which the objectives of a project are being realized
provides the primary criterion for an evaluation. The analyst looks systematically at the
elements of success and failure in the project experience to learn how better to plan for
the future.

Evaluation is not limited only to completed projects. It is a most important managerial

tool in on-going projects and rather, formalized evaluation may take place at several times
in the life of a project. Evaluation may be undertaken when the project is in trouble as the
first step in a re-planning effort. Careful evaluation should precede any effort to plan for
new projects and it is also needed to follow-up the progress of projects. And, finally
evaluation should be undertaken when a project is terminated or is well into routine
operation.

Different groups or units may do the evaluation of projects. Among others,

 Project’s management unit often continuously evaluates its experience as

implementation proceeds.
 The sponsoring agency, perhaps, the operating ministry, the planning agency, or
an external assistance agency may undertake evaluation.
In large and innovative projects, the project’s administrative structure may provide a separate
evaluation unit responsible for monitoring the projects implementation and for bringing
problems to the attention of the projects’ management. Evaluation can help not only in the
management of the project after the initial phase, but also help in the planning of future
projects. Experience with one project can give rise to new ideas for extension of the project,
repetition, the need for “vertically” associating projects that supply inputs to or process
products from this project, and other ideas which become the seeds to generate new project
proposals.
2.3. The UNIDO Project Cycle

The UNIDO has established a project cycle comprising the following three distinct phases:

1. The pre-investment phase

2. The investment phase, and
3. The operating phase.

Each of these three phases is divided into stages, some of which constitute important
consultancy, engineering, and industrial (manufacturing) activities. In this regard, increasing
importance should be attached to the pre-investment phase as a central point of attention,
because the success or failure of an industrial project ultimately depends on the marketing,
technical, financial and economic findings and their interpretations, especially in the
feasibility study. To reduce wastage of scarce resources, a clear comprehension of the
sequence of events is required when developing an investment proposal from the conceptual
stage by way of active promotional efforts to the operational stage.

1. The pre-investment phase:

According to the UNIDO manual, the pre-investment phase comprises several stages:

 Identification of investment opportunities (opportunity studies)

  Analysis of project alternatives and preliminary project selection as well as project
preparation (pre-feasibility and feasibility studies), and
 Project appraisal and investment decision (specialized appraisal reports)
Support or functional studies are also part of the project preparation stage and are usually
conducted separately, for later incorporation in a pre-feasibility study or feasibility study as
appropriate. Though it is easier to grasp the scope of an opportunity study, it is not an easy
task to differentiate between a pre-feasibility and feasibility study in view of the frequently
inaccurate use of these terms.

The division of the pre-investment phase into stages avoids proceeding directly from the
project idea to the final feasibility study without examining the project idea systematically or
being able to present alternative solutions. This cuts out many feasibility studies that would
have little chance of reaching the investment phase. Finally, it ensures that the project
appraisal to be made by national or international financing institutions becomes an easier task
when based on well-prepared studies. All too often, project appraisal actually amounts to
project preparation, given the low quality of the feasibility study submitted.

(A) Opportunity Studies

The identification of investment opportunities is the starting-point in a series of investment-
related activities, when potential investors (private or public) are interested in obtaining
information on newly identified viable investment opportunities. The main instrument used
to quantify the parameters, information, and data required to develop a project idea
into a proposal is the opportunity study, which should analyze:

 Natural resources
 The existing agricultural base (it may be the basis for agro-industries)
 Future demand for consumer goods
 Imports substitution and export possibilities
 Environmental impacts (mandatory or non-revenue producing projects)
 Expansions of existing capacity
 Manufacturing sectors (successful in other countries)
 Diversification
Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on
detailed analysis. Opportunity studies could be general or specific.
  General opportunity studies (“sector approach") could be area studies designed to
identify opportunities on a given area (Administrative province, backward region);
industry studies to identify opportunities in delimited industrial branch; and resource-
based studies to reveal opportunities based on the utilization of natural, agricultural,
or industrial resources.
 Specific project opportunity studies (“enterprise approach”) are seen in the form
of products with potential for domestic manufacture. A specific project opportunity
study may be defined as the transformation of a project idea into a broad investment
proposition.
A project opportunity study should not involve any substantial cost in its preparation, as it is
intended primarily to flashlight the principal investment aspects of a possible industrial
proposition. The purpose of opportunity study is to arrive at a quick and inexpensive
determination of salient facts of an investment possibility.

(B) Pre-Feasibility Studies

The project idea must be elaborated in a more detailed study. However, formulation of a
feasibility study that enables a definite decision to be made on the project is a costly and
time-consuming task. Therefore, before assigning larger funds for such a study, a further
assessment of the project idea might be made in a pre-feasibility study. This is to see if:

All possible project alternatives are examined,

The project concept justifies detail study,
All aspects are critical and need in-depth investigation, and
The project idea is viable and attractive or not.
A pre-feasibility study should be viewed as an intermediate stage between a project
opportunity study and a detailed feasibility study, the difference being in the degree of detail
of the information obtained and the intensity with which project alternatives are discussed.
The structure of a pre-feasibility study should be the same as that of a detailed feasibility
study.

(C) Support/Functional/Studies
Support or functional studies cover aspects of an investment project, and are required as
prerequisites for, or in support of, pre-feasibility and feasibility studies, particularly for large-
scale investment proposals. This may include:

Market studies of products

 Raw material and factory supply studies
Laboratory and pilot plant tests
Location studies
Environmental impact assessment.
Economies of scale studies
Equipment selection studies
The contents of a support study vary, depending on the type and nature of the projects.
However, as it relates to a vital aspect of the project, the conclusions could be clear enough to
give directions to the subsequent stage of project preparation. In most cases, a support study
when undertaken either before or together with a feasibility study, form an integral part of the
latter and lessen its burden and cost.

(D) Feasibility Studies

A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic, and environment prerequisites for an investment
project should, therefore, be defined, refined and critically examined based on alternative
solutions already reviewed in the pre-feasibility study. The results of these efforts is then a
project whose background conditions and aims have been clearly defined in terms of its
control objective and possible marketing strategies, the possible market shares that can be
achieved, the corresponding production capacities, the palnt location, existing raw materials,
appropriate technology and mechanical equipment and, if required, an environmental impact
assessment.

The financial part of the study covers the scope of the investment, including the net working
capital, the production and marketing costs, sales revenue, and the return on capital invested.
Final estimates on investment and production costs and its subsequent calculations of
financial and economic profitability are only meaningful if the scope of the project is defined
unequivocally(clearly) in order not to omit any essential part and its related cost.

There is no uniform approach or pattern to cover all industrial projects of whatever type, size
or category. The emphasis on the components varies from project to project. For most
industrial projects, however, there is a broad format of general application-bearing in mind
that the larger the project the more complex will be the information required. Although
feasibility studies are similar in content to pre-feasibility studies, the industrial investment
project must be worked out with the greatest accuracy in an iterative optimization process,
with feedback and inter-linkages, including the identification of commercial, technical, and
entrepreneurial risks.

The sensitive parameters such as the size of the market, the production program, or the
mechanical equipment selected should be examined more closely. A feasibility study should
be carried out only if the necessary financing facilities, as determined by the studies, can be
identified with a fair degree of accuracy. There would be little sense in a feasibility study
without the reliable assurance that, in the event of positive study findings, funds could be
made available. For that reason, possible project financing must be considered as early as the
feasibility study stage because financing conditions have a direct effect on total costs and,
thus, on the financial feasibility of the project.

(E)Appraisal Report

When a feasibility study is completed, the various parties will carry out their own appraisal of
the investment project in accordance with their individual objectives and evaluation of
expected risks, costs, and gains. Large investment and development finance institutions have
a formalized project appraisal procedure and usually prepare appraisal reports. This is the
reason why project appraisal should be considered an independent stage of the pre-investment
phase, marked by the final investment and financing decisions taken by the project
promoters.

The appraisal report will prove whether the pre-production expenditures spent since the
initiation of the project idea were well spent or not. Project appraisal as carried out by
financial institutions concentrates on the health of the company to be financed, the returns to
be obtained by equity holders and the protection of its creditors. The techniques applied to
appraise projects in line with these criteria center around technical, commercial, market,
managerial, organizational, and financial and possibly also economic aspects.

2. The Investment/implementation Phase

The investment or implementation phase of a project provides wide scope for consultancy
and engineering work, first and foremost in the field of project management. The investment
phase can be divided into the following stages:

 Establishing the legal, financial, and organizational framework

 Tendering, evaluation of bids, and negotiations
  Technology acquisition and transfer
 Detailed engineering design and contract, including tendering, evaluation of bids and
negotiations
 Acquisition of land, construction work and installation
 Pre-production marketing, including the securing of supplies and suppliers and setting
up the administration of the firm.
 Recruitment and training of personnel
 Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the final
selection of construction planning and time scheduling of factory construction, as well as the
preparation of flow charts, scale drawing, and a wide variety of layouts.

During the stage of tendering and evaluation of bids, it is especially important to receive
comprehensive tenders for goods and services for the project from a sufficiently large number
of national and international suppliers of proven efficiency and with good delivery capacity.

Negotiations and contracting are concerned with the legal obligations arising from the
acquisition of technology the construction of buildings, the purchase and installation of
machinery and equipment and financing. This stage covers the signing of contracts between
the investor or entrepreneur, on the one hand, and the financing institutions, consultants,
architects and suppliers of raw materials and required inputs, on the other.

The construction stage involves the site preparation, construction of buildings and other
civil works, together with the erection and installation of equipment in accordance with
proper programming and scheduling.

The personnel recruitment and training stage, which should proceed simultaneously with
the construction stage, may prove very crucial for the expected growth of productivity and
efficiency in plant operations.

Of particular relevance is the timely initiation of marketing arrangements to prepare the

market for the new products (pre- production marketing) and secure critical supplies (supply
marketing).
Plant commissioning and start up is usually a brief but technically critical span in project
implementation. It links the proceeding construction phase and the following operational
(production) phase.

In general, it is to be noted that in the pre-investment phase, the quality and

dependability of the project are more important than the time factor, while in the
investment phase, the time factor is more critical in order to keep the project within the
forecast made in the feasibility study.

3. The Operating Phase

The problem of the operating phase needs to be considered from both a short and a long-term
view point.

 The short-term view relates to the initial after commencement of production when a
number of problems may arise concerning such matters as the applications of
production techniques, operation of equipment, or inadequate labor productivity
owing to lack of qualified staff and labor. Most of these problems have their origin in
the implementation phase.
 The long-term view relates to chosen strategies and the associated production and
marketing costs as well as sales revenues. These have a direct relationship with the
projections made at the pre-investment phase. If such strategies and projection prove
faulty, any remedial measures will not only be difficult but may prove highly
expensive.
The given outline of the investment and operating phases of an industrial project is
undoubtedly an oversimplification for many projects, and, in fact, certain other aspects may
be revealed that even greater short or long term impacts.

There are various ways in which the project cycle may be viewed and portrayed depending
on the purpose, emphasis, and detail required to illustrate. According to the Guidelines to
project planning in Ethiopia (1990) of Development Project Studies Authority (DEPSA),
the project cycle comprises three major phases,

1. Pre-investment
2. Investment, and
3. Operating phase.
Each of these three phases may be divided into stages. The Guidelines has divided the Project
cycle into six stages as follows:

1. Identification
2. Preparation
3. Appraisal/decision
4. Implementation
5. Operation
6. Ex-post evaluation.
The pre-investment phase consists of the first three stages, the investment phase includes the
fourth stage, and the operation phase covers the last two stages. The project cycle means the
various stages of information gathering and decision-making, which take place between a
project’s inception and completion.

In reality, these are somewhat artificial, but do serve to emphasize the need to think of project
planning as a process of decision-making taking place overtime. Broadly speaking, what is
important about this process is that it should begin with the identification of number of
alternatives, using existing information and gathering new data in such a way as to limit
alternatives under consideration to those few, which are more promising.

Throughout the project cycle, the primary preoccupation of the analyst is to consider
alternatives, evaluate them, and to make decisions as to which of them should be advanced to
the next stage. In short, the project planning process is essentially a task of eliminating less
viable ideas and alternatives; and in the continuum, planner naturally hopes that the best
alternative will emerge. In this process:

 The results and/or outputs of a given stage serve as the input or part of the input of the
next stage, if it is decided to proceed to the next stage;
 The output or part of the output of one stage may be used as new input (feedback) to
reconsider or revise, where necessary, the result of proceeding stages; and
 Most importantly, the results of the implementation, operation, and ex-post evaluation
stages of a project constitute valuable experienced for the preparation of subsequent
projects provided these inputs are systematically documented and analyzed.
Chapter Three: Project Preparation
3.1 Feasibility study
A project feasibility study is a key process that justifies whether to go ahead with a certain
project idea or to disregard it. As the name implies, a feasibility study is an analysis of the
viability of an idea from different parameters. The feasibility study focuses on helping answer
the essential question of “Should we proceed with the proposed project idea?”

A feasible business venture is one where the business will:

 generate adequate cash-flow and profits,

 Withstand the risks it will encounter.
 Remain viable in the long-term and meet the goals of the founders.
The venture can be a new start-up business, the purchase of an existing business, an
expansion of current business operations, or a new enterprise for an existing business.
Feasibility study is only one step in the business assessment and development process. The
feasibility study helps to “frame” and “flesh-out” specific business scenarios so they can be
studied in-depth.

During this process the number of business alternatives under consideration is usually quickly
reduced. During feasibility process you may investigate variety of ways of organizing the
business and positioning your product in the market place. It is like an exploratory journey
and you may take several paths before you reach your destination. There is often some
confusion between a feasibility study and a business plan. A feasibility study is not a
business plan.

The business plan outlines the actions needed to take the proposal from “idea” to “reality.”
The feasibility study outlines and analyzes several alternatives or methods of achieving
business success. So the feasibility study helps to narrow the scope of the project to identify
the best business scenarios. The business plan deals with only one alternative or scenario. The
feasibility study helps to narrow the scope of the project to identify and define two or three
scenarios or alternatives. The consultant conducting the feasibility study may work with the
group to identify the “best” alternative for their situation. This becomes the basis for the
business plan.

The feasibility study is conducted before the business plan. A business plan is prepared only
after the business venture has been deemed to be feasible.

REASONS TO DO A FEASIBILITY STUDY

Conducting a feasibility study is a good business practice. Examination of successful

business organizations indicates that they do not go into new business venture without first
thoroughly examining all of the issues and assessing the probability of business success.

A feasibility study will:

 Narrow business alternatives and give focus to the project

 Surface new opportunities through the investigative process
 Identify reasons not to proceed
 Enhance the probability of success by addressing and mitigating (to lessen) factors
early on that could affect the project.
 Provide quality information for decision-making.
 Help to increase investment in the company: Investment will be enhanced by
companies through wise use of resources.
 Provide documentation that the business venture was thoroughly investigated.
 Help in securing funding from lending institutions and other monetary sources.
The feasibility study is a critical step in the business assessment process. If properly
conducted, it may be the best investment one ever makes.

REASONS GIVEN NOT TO DO A FEASIBILITY STUDY

Project leaders and sponsors may find themselves under pressure to skip the “feasibility
analysis” step and go directly to building a business. Individuals from within and outside of
the project may push to skip this step. Reasons given for not doing feasibility analyses
include the following;

 We know that it is feasible as an existing business is already doing it

 Why do another feasibility study when one was done just a few years ago: previously
conducted feasibility studies will not be useful to make an investment decision currently
because as time passes several changes are encountered in the political, economic, social,
and technological (PEST) environments. Hence recent data shall be gathered for the
project idea at hand.
 Feasibility studies are just a way for consultants to make money
 The market analysis has already been done by business that is going to sell us the
equipment: feasibility study of the equipment manufacturer or distributor doesn’t help
other next parties in the channel through transitivity. Hence, a computer assembly is
feasible doesn’t mean a computer training center will be feasible any time.
 Why not just hire a general manager who can do the study: a general manager is always
hired after a feasible business idea has been obtained and is in the process of being
implemented or is in operation.
 Feasibility studies are a waste of time: though feasibility studies will take time to
complete, reversing a wrong decision that was undertaken without feasibility studies will
require more time and the incurrence of other scarce resources.
The reasons given above should not discourage business people from conducting a
meaningful and accurate feasibility study because, once decisions have been about
proceeding with a proposed business, they are often difficult to change. However, some
aspects of the feasibility study may even require special attention through support or
functional studies.

SUPPORT (FUNCTIONAL) STUDIES)

Support or functional studies cover specific aspects of an investment project, and are required
as prerequisite for, or in support of, pre-feasibility and feasibility studies and particularly
large scale investment proposal. Support or Functional studies are also a part of project
preparation stage and are usually conducted separately, for later incorporation in the
prefeasibility or feasibility studies.

Examples of such studies are as follows:

 Market studies of the products to be manufactured, including demand projections in the

market to be served together with anticipated market penetration.
 Raw material and supply studies, covering current and projected availability of raw
materials and inputs basic to the project, and the current and projected price trends of
such materials and inputs.
 Laboratory and pilot-plant tests, which are carried out to the extent necessary to
determine the suitability of particular raw materials or products.
In most cases, the results of a support study, when undertaken either before or together with a
feasibility study, form an integral part of the latter and lessen its burden and cost. The last
outcome of the feasibility study is the final appraisal and report.

PROJECT APPRAISAL (APPRAISAL REPORT)

When a feasibility study is completed the various parties involved in the project will carry out
their own appraisal of the investment project in accordance with their individual objectives
and evaluation of expected risks, costs and gains. A formal project appraisal report is usually
required at the end of a feasibility study. The better the quality of the project feasibility study
made, the easier will be the appraisal work to be performed. The techniques applied to
appraise a project may revolve around technical, commercial, market, managerial,
organizational, financial and economic aspects of the project under consideration.

The findings of a feasibility study will be summarized in what is called the executive
summary.

EXECUTIVE SUMMARY

The feasibility study should begin with a brief executive summary outlining the project data
(assessed and assumed) and the conclusions and recommendations which would then be
covered in detail in the body of the study. However, any supporting material such as
statistics, results of market surveys, detailed technical descriptions and equipment lists, plant
layouts etc should be presented in a separate annex of the study.

The executive summary should concentrate on and cover all critical aspects of the study, such
as the following:

 The degree of reliability of the data on the business environment.

  project inputs and outputs
 the margin of error (uncertainty and risk) in forecasts of market, supply and
technological trends, and
 The project design.
The executive summary should have the same structure as the body of the feasibility study
and cover, but not limited to, the following areas:

1. Summary of the project background and history:

 project background
 Name and address of project promoter
 Project objective and outline of the proposed basic project strategy including
geographic area and market share.
 Project location : orientation towards the market or towards resources (raw
materials)
 Economic and industrial policies supporting the project.
2. Summary of market analysis and marketing concept:
 Summarize results of marketing research: business environment, target market
and market segmentation, channels of distribution, competition.
 List annual data on supply and demand
 Indicate projected marketing costs, elements of the projected sales programs
and revenues
 Describe impacts on raw materials and supplies, location, the environment, the
production program, plant capacity and technology
3. Raw materials and supplies:
 Describe general availability of raw materials, processed industrial materials
and components, factory supplies, spare parts, supplies for social and external
needs.
 List annual supply requirements of material inputs
 summarize availability of critical inputs and possible strategies
4. Location, site and environment:
 Identify and describe location and plant site selected, including ecological and
environmental impact, socio economic policies, infrastructural conditions and
environment
 summarize critical aspects and justify choice of location and site
  Outline significant costs relating to location and site
5. Engineering and technology:
 Outline of production program and plant capacity
 Describe and justify significant advantages and disadvantages and
disadvantages as well as life cycle and transfer of technology, training, risk
control, costs, legal aspects etc.
 Describe the layout and scope of the project
 summarize main plant items, their availability and costs
 describe required major civil engineering works
6. Organizational and Overhead costs:
 Describe the basic organizational design of the project
 Indicate management and measures required

7. Human resources:
 describe the socioeconomic and cultural environment as related to significant
project requirements as well as human resources availability, recruitment and
training needs, and reasons for the employment of foreign experts, to the
extent required for the project
 Indicate key points (skills) required and total employment numbers and costs
8. Project implementation Schedule:
 Indicate duration of plant erection and installations
 Indicate duration of production start up and running period
 Identify actions critical for the timely implementation of the project
9. Financial analysis and investment appraisal:
 Summary of criteria governing investment appraisal
 Total investment costs: major investment data showing local and foreign
components for land and site preparation; structures and civil engineering
works; plant, machinery and equipment; preproduction expenditures and costs,
net working capital requirements
 Total costs of products sold such as operating costs, depreciation charges,
marketing costs, finance costs
 project financing: sources of finance, impact of cost of financing and debt
servicing on project proposal, and public policy on financing
  aspects of uncertainty including critical variables, risks and possible strategies
and means of risk management
 national economic evaluation
 Conclusions concerning: major advantages of the project, major drawbacks of
the projects and chance of implementing the project.
3.2 Market and Demand Analysis
Market analysis is a process of assessing the level of demand for the product or service to be
produced from the project. This in other words means determining the marketability of the
product or the service of the project under consideration. Different techniques of demand
forecasting are used in analyzing the availability of market for the products and assessing the
level of demand.

Objective of the study:

The study of market and demand analysis, being the first in project preparation, has the
following main objectives:

 To systematically assess the market and the market environment to generate pertinent
data.
 To collect, analyze, and report data about a specific market situation
 To obtain insight about the target market structure
 To identify customers’ needs and behavior in the market.
 To design the marketing mix fit in the context
 To identify available distribution channels
 To identify competitors and their characteristics in the target market
 To determine the socio-economic aspects relevant to the preparation and evaluation of
the project’s market strategy
 To identify the existing strengths and weaknesses in the internal environment of the firm
 To project the level of demand expected
 To delineate marketing opportunities and threats
 To decide on subsequent aspects of a project
 To develop sales program of the firm.
IMPLICATIONS FOR PROJECT ANALYSIS:

In most cases, the first step in project analysis is to estimate the potential size of the market
for the product proposed to be manufactured (or service planned to be offered) and get an
idea about the market share that is likely to be captured. Put differently, market and demand
analysis is concerned with determining the:

 Likely aggregate demand for the product, and

 Possible market share expected for the product.
The first stage in preparing the feasibility study comprises the estimation of size, composition
and development trends of demand for the product or products, careful analysis of
determining variables and their market environment, demand forecast and the ultimate goal
of the procedure: sales volume and revenue projections. the extensive and careful analysis of
past, present and future demand for the product to be produced, together with market,
institutional, and political forces influencing demand and sales of the product in question, is
of crucial importance to the success of the entire project.

Estimates of Sales revenue, at a later stage of feasibility study, will be the basis for
evaluation of alternatives and final decisions regarding:

 Production program
 plant capacity
 material and input choice
 Location
 Financial evaluation
 Ultimate marketing strategy.
Given the importance of market and demand analysis, it should be carried out in an orderly
and systematic manner, which, in other words, emphasizes the necessity of a marketing
research. The key steps in such analysis/research could broadly be stated as follows:
 Situational analysis and specification of objectives
 Collection of secondary information
 Conducting market survey (primary information)
 Characterization of the market
 Demand forecasting
 Market planning.
 3.3 Technical analysis
Technical analysis is based on the description of the product and specifications and also the
requirements of quality standards. The analysis encompasses available alternative
technologies, selection of the most appropriate technology in terms of optimum combination
of project components, implications of the acquisition of technology, and contractual aspects
of licensing. Special attention is given to technical dimensions such as in project selection.
The technology chosen should also keep in view the requirements of raw materials and other
inputs in terms of quality and should ensure that the cost of production would be competitive.
Technical analysis implies the adequacy of the proposed plant and equipment to prescribed
norms. It should be ensured whether the required know how is available with the
entrepreneur. The following inputs concerned in the project should also be taken into
consideration.
 Availability of Land and site
 Availability of Water Power, transport, communication facilities.
 Availability of servicing facilities like machine shop, electric repair shop etc.
 Coping with anti-pollution law
 Availability of work force
 Availability of required raw material as per quantity and quality.
3.4 Environmental impact analysis
Environmental Impact Studies:
All most all projects have some impact on environment. Current concern of environmental
quality requires the environmental clearance for all projects. Therefore environment impact
analysis needs to be undertaken before commencement of feasibility study.
Objectives of Environmental Impact Studies:
• To identify and describe the environmental resources/values (ER/Vs) or the environmental
attributes (EA) which will be affected by the project (in a quantified manner as far as
possible).
• To describe, measure and assess the environmental effects that the proposed project will
have on the ER/Vs.
• To describe the alternatives to the proposed project this could accomplish the same results
but with a different set of environmental effects.
The environmental impact studies would facilitate providing necessary remedial measures in
terms of the equipment’s and facilities to be provided in the project to comply with the
environmental regulation specifications.
 3.5 Financial analysis
Financial Cost-Benefit Analysis
The analysis of financial costs and benefits is a key step in the project preparation process,
which seeks to ascertain whether the proposed project will be financially viable i.e. in the
sense of being able to meet the burden of servicing debt and whether the proposed project
will satisfy the returns/expectations of those who provide capital and/or the promoters.

The primary purpose of doing a financial analysis of a project is to evaluate the project’s
profitability or cost-effectiveness relative to some alternative project or investment.
Frequently, the results of the financial analysis are used to compare alternative projects to
select which ones should be implemented. Sometimes projects are mutually exclusive, such
as alternate prescriptions for a stand. In this case, only one project will be selected and the
task is solely to determine which of the choices is best. In other cases, any or all of the
projects can be implemented, and the task is to identify all of the projects which should be
pursued.

Objectives of Financial cost-benefit analysis:

 To establish the project’s financial viability for the private investor

 Commercial profitability is the yardstick for selection among competing projects.
Components of financial analysis:

 Investment cost estimation

 Revenue estimation
 Production costs & expenses
 profitability analysis
 Cash flow estimation and analysis
 Financial ratio analysis
 Uncertainty/risk analysis
 Debt repayment schedule

3.5.1. Importance and Steps of Financial Feasibility

Financial feasibility is the process of identifying the overall investment outlay, determining
expected rate of returns and evaluating project financially.
Financial feasibility is crucial for any organization as:

 It influences the firm’s growth in long term

 It affects risk of the firm into consideration
 It involves huge quantum of funds generally
 A wrong decision with regard to investment of huge sum of funds may prove fatal for an
existing firm.
 A careful analysis of cash outflows and inflows is essential before applying any capital
budgeting technique.

Capital budgeting is the process of identifying, evaluating and selecting a project that requires
large sums of funds and generates long-term benefits in future.

The various steps involved in financial analysis are:

 Estimation of cost of project: There are various components of the cost of project. It
mainly consists of two types of costs, fixed investment and working capital. The cost of
project includes all costs incurred before commissioning of commercial production
(manufacturing projects) or operations (service projects).
 Estimation of project cash flows: This estimate involves all the project cash flows
during the life cycle of the project. It includes the initial investments, cash flows
generated during operations, and at the termination of a project.
 Estimation of expected rate of return: For financing a project, there are many sources
of funds. After careful evaluation, we design optimum capital structure for the firm. The
expected return from the project includes two components, risk free component (generally
weighted average cost of capital) and risk component (risk premium due to the
investments).
 Application of decision rule: The last stage of financial analysis is to apply various tools
for checking the financial feasibility of a project. Capital budgeting techniques are
applied to ascertain profitability and expected returns from the project.

Technical aspects of financial analysis:

At the technical level of financial analysis, the basic activities involved are:
  Projection of cash inflows and outflows- for each period that enables computation of
net cash flows of the project,
 Setting of the cost of capital-which is a very difficult task in countries like ours where
there is no capital markets,
 Discounting of net cash flows of the project.
Why evaluate cash flows rather than profits?

 Cash is what ultimately counts-profits are only a guide to cash availability: they
cannot actually be spent.
 Profit measurement is subjective-the time period in which income and expenses are
recorded, and so on, are a matter of judgment,
 Cash is used to pay dividends-dividends are the ultimate method of transferring
wealth to equity shareholders.
Determining relevant cash Flows:

Elements of cash inflows and outflows of the project under consideration can be
described as follows:

Cash inflows: project cash inflows are expected to appear from the following sources:

 Sales of the products or services

 Sales of by products
 recovery of net working capital
 other miscellaneous sources
Cash outflows- the project will have the following major categories of cash outflows:

Initial investment costs: These are defined as the sum of fixed assets (fixed investment costs
plus pre-production expenditures) and net working capital. Expenditures for fixed assets
constitute the resources required for construction and equipping an investment project.

 Investment costs = fixed capital + Net working capital

 Fixed capital = fixed investment + pre-production capital costs,
Hence, investment costs = fixed investment + pre-production capital costs + Net working
capital

Production costs: Production costs include the following three main categories of costs:

 Material costs (direct)

  Labor costs (direct)
 Factory overhead costs- represent indirect materials and parts, indirect labor and other
overhead costs such as depreciation of facilities and equipment’s etc.
Two approaches of determining the projected cash flows of a project:

 A cash flow forecast based on the income statement, in which the statement is
adjusted for non-cash items. The resulting figure refers to funds provided by
operations. Considering cash flows not recognized in the income statement leads to
the final funds position of the project.
 A cash receipts and disbursement statement, or the cash budget, reflecting the initial
cash balance, the receipt for the period, the expected disbursements and the ending
cash balance.
Supporting schedules for financial analysis are the following:

 Investment cost schedule

 production cost schedule
 Working capital schedule
 Loan repayment schedule
1. Steps in Financial Analysis
In a real-life management situation, conducting a financial analysis involves far more than
simply calculating a net present value. Generally, you will need to identify the data to use in
the analysis. Often, you will have to decide for yourself which data are relevant and should
be included. Part of the analysis process is sifting through all of the potentially relevant
information to identify what is most important. Sometimes it is not even clear what the
question is. The following is a list of general steps typically involved in a financial analysis.
It is intended to give you an idea of how you might work your way through the overall
process.

1. Identify exactly what the question is. This step is often called “framing the question.”
It may seem like a trivial step; however, it is perhaps the most important. Usually, a
financial analysis is done to provide input into some decision-making process. Here are
some questions that should be asked:
 What is the decision that needs to be made?
 Was there a problem which precipitated the need for a decision?
 What issues need to be addressed by the decision?
  Who will be affected by the decision?
 Have all potential stakeholders been considered?
 How will the results of the financial analysis be used in making the decision?
 Have all of the possible alternatives been considered?
2. Establish the scope of the financial analysis problem. It is generally not necessary or
even desirable, to consider everything that might affect a project. Part of the analysis
should involve identifying the key aspects of the project. The following are some basic
questions that should be considered before initiating any financial analysis problem.
 Which impacts will be included in the analysis?
 Will the analysis consider only timber-related impacts, or will it include wildlife,
water quality, recreation aesthetic, or other impacts?
 Will the analysis consider only impacts that affect the owner of the forest land, or
should the analysis also account for impacts on neighboring lands?
 What about the general public?
 When does the project end? Does it have an end?
 How far out should you go in considering impacts?
 What is the time horizon of the analysis?
3. Identify the schedule of events associated with the project.
 When are activities expected to happen?
 When do benefits occur?
 When are goods produced? When are services provided?
 When do costs occur?
 Are there any other significant events that should be considered?

4. Quantify and value events wherever possible. For each good, service, cost or benefit that
occurs, three pieces of information is needed:

1) The quantity, 2) the value (generally, this would be the quantity times its price), and 3) the
timing of the good, service, cost or benefit (this was determined in step 3). This raises many
questions:

 How will the impacts of the project be predicted?

 What sources of data are available?
 Are there published data that can be used?
 If existing data are not available, will original data be collected?
  To what extent can or should expert opinion be used?
 Are there models that apply to the situation?
 For example, how will future prices be predicted?
 What price data are available?
 How will future timber yields be predicted?
 How might impacts on wildlife, water, recreation, or aesthetics be predicted?
 Sometimes items are relatively easy to quantify but difficult to value; for example, the
number of acres of a particular type of grouse habitat may be easy to measure, but
what is its value?

5. Select an alternate rate of return and calculate the project’s net present value.

A key consideration when selecting a discount rate is the financial position of the person
or company for whom the analysis is being done. L If the person (or company) is going
to borrow money to carry out the project, and then the rate of interest on the loan is
usually the best discount rate. L If the person (or company) is going to invest their own
money in the project, and then the ideal discount rate would be the rate of return on the
investment that the money would be used for if the project was not pursued.

INVESTMENT PROJECT APPRAISAL METHODS:

Once the above analysis is made, the next tasks are going directly to the project appraisal
techniques. Investment project appraisal methods are classified into two basic categories.
These are non-discounted cash flow methods and discounted cash flow methods.

A. NON-DISCOUNTED CASH FLOW METHODS:

I. PAYBACK PERIOD METHOD: Payback period is the easiest method to assess
financial feasibility. Payback period is the time period in which the investor gets back
his invested money in fixed assets from the project. The payback period is the number
of years required to return the original investment from the net cash flows (net
operating income after taxes plus depreciation). When deciding between two or more
competing projects the usual decision is to accept the one with the shortest payback.
The decision rules are:

 If payback < acceptable time limit, accept project

 If payback > acceptable time limit, reject project
Merits of payback as an investment appraisal technique:
  Simplicity
 Rapidly changing technology- If new plant is likely to be scrapped in a shorter period
because of obsolescence, a quick payback is essential.
 Improving investment conditions-when investment conditions are expected to
improve in the near future, attention is directed to those projects which will release
funds soonest, to take advantage of the improved climate.
 Payback favors projects with a quick return.
Demerits of payback as an investment appraisal technique:

 Project return may be ignored

 Timing is ignored
 Lack of objectivity
 Project profitability is ignored
Example: Assume that a firm is considering two projects: Project A and Project B, each
requires an investment of Br 100 million. The cost of capital is 10%. Below is the summary
of expected net cash flows in millions.

Year Project A Project B

1 50 10
2 40 20
3 30 30
4 10 40
5 1 50
6 1 60

Required: Calculate the payback period and comment upon the two projects.

II. ACCOUNTING RATE OF RETURN (ARR): It uses data from the income statement.
This is computed by using the following formula:

Accounting rate of return= Average net profit

Average Annual Investment

Example: Assume the company invested in the construction of Business Machine whose
investment cost is $607,500. Useful life is 4 years. Estimated disposal value is zero, and
expected cash inflow from operations is $ 200,000.

Required: Accounting Rate of Return

Advantages of using ARR method:

 It is simple to calculate using accounting data

 Earnings of each year are included in calculating the profitability of the project.
Disadvantages of using ARR method:

 It is inconsistent with wealth maximization as the objective of the firm

 Since it uses the accounting data it includes the amount of accruals in calculating the
earnings “net profit”
 It is based on the familiar accrual accounting
 It ignores the time value of money

B. DISCOUNTED CASH FLOW METHODS:

I. NET PRESENT VALUE METHOD (NPV):

It is the method of evaluating projects that recognizes that the Birr received immediately is
preferable to a Birr received at some future date. It is the sum of all of the discounted net
benefits (benefits minus costs) associated with a project. It is the most widely accepted
criterion for selecting between projects. It discounts the cash flows to take into account the
time value of money. Net present value is the most common approach used in the field of
financial investment analysis. It is very simple to use and evaluates on the basis of wealth
maximization objective. It is defined as the difference between the present value of cash
inflows and the present value of cash outflows. Profitability index is the ratio of inflows and
outflows whereas net present value (NPV) is the difference between the two.

NPV = Present value of cash inflows – Present value of cash outflows

If the NPV is positive, the project will be accepted; if negative, it should be rejected.
Problems with NPV are it is difficult to explain to non-finance people and solution is in Birr
amounts, not in percentage rates of return.
The criterion for project acceptability is NPV > 0. A NPV > 0 indicates that the project will
be able to pay interest on all of the capital invested in the project, plus earn an excess return
(or true profit) equal to the NPV. As a general rule, all projects with a positive NPV should
be pursued. If all non-mutually exclusive projects with a positive NPV cannot be pursued
due to limited capital, then capital is really scarcer than implied by the interest rate, and the
alternate rate of return used in the calculations does not reflect the true cost of capital. In this
case, a higher discount rate should be used.
In general, for mutually exclusive projects, a project with a higher NPV is better than a
project with a lower NPV. This is not a rule that should be applied blindly, however. One
project may have a higher NPV simply because it is a bigger project, with proportionally
large investment requirements. The Benefit/Cost Ratio is also useful because it takes into
account the relative size of the investment.
I. INTERNAL RATE OF RETURN METHOD (IRR):
The IRR is the estimated rate of return for a proposed project, given its incremental cash
flows.
OR The IRR is the discount rate that makes the present value of a project’s cash flows equals
its initial investment.
OR The IRR is the discount rate that makes the NPV equal to zero.
The IRR is the discount rate for which the NPV of a project is 0. The criterion for project
acceptability is that IRR > ARR. It is widely used, largely because it seems easy to interpret.
The IRR is not generally a good way to evaluate investment alternatives. The IRR assumes
that all of the profits (net revenues after accounting for costs) from a project should be
counted as a return to the capital used in the project. However, if the correct alternate rate of
return is known, then this rate is the only payment that should be attributed to the capital used
in the project. For example, if all of the capital used for a given project is borrowed at a
given interest rate, then the interest paid on the borrowed capital is the true and total cost of
the capital. It is not necessary to pay any more than this for the use of the capital. If a project
has a positive net present value when the appropriate alternate rate of return is used, then this
positive net present value should be interpreted as “true profits.” Generally, the true profits
of a project should be attributed to the skill of the designers and managers of the project.
(Sometimes these true profits are attributed to the land, as when we calculate a land
expectation value. This makes some sense when we are trying to assess the value of a piece
of forest land. However, if we know what the land is worth, or what it would rent for, then
attributing the excess profits to the land would also be incorrect.)
Another problem with the IRR has to do with how intermediate costs or returns are treated.
The IRR assumes that funds to cover intermediate costs are borrowed at the IRR and that
intermediate returns can be reinvested at the IRR. This is perhaps the most serious
shortcoming of the IRR, as the borrowing rate and the reinvestment rate will usually be
independent of the project under consideration. To properly calculate an IRR, therefore, you
need to explicitly account for the rate paid for borrowed money and the rate received on
reinvested intermediate returns. However, if you know what these rates are, then you already
have all the information you need to select an appropriate alternate rate of return to use in
calculating the NPV.
You will sometimes get different results from the maximum NPV criterion than from the
maximum IRR criterion. So, which investment is the best: the one that maximizes the NPV
or the one that maximizes the IRR? The answer is usually the one that maximizes the NPV.
Note: The hurdle rate is considered the firm’s required rate of return on investment
projects of average risk. If the project’s IRR ≥ the hurdle rate, it should be accepted,
otherwise it should be rejected.
Advantages of using IRR include the following:

 Considers all cash flows

 Considers time value of money
 Comparable with hurdle rate
Disadvantages of using IRR include the following:

 It does not show Birr improvement in value of firm if a project is accepted

 IRR can be affected by the scale (size) of the project, i.e., initial investment.
 There will be possibility if existence of multiple IRRs.
II. PROFITABILITY INDEX:
Profitability index (PI), also known as profit investment ratio (PIR) and value investment
ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for
ranking projects because it allows you to quantify the amount of value created per unit of
investment. Profitability index is an investment appraisal technique calculated by dividing the
present value of future cash flows of a project by the initial investment required for the
project.
Profitability Index= Present Value of Future Cash Flows
Initial Investment Required
Explanation:
Profitability index is actually a modification of the net present value method. While present
value is an absolute measure (i.e. it gives as the total dollar figure for a project), the
profitability index is a relative measure (i.e. it gives as the figure as a ratio).
Decision Rule
Rules for selection or rejection of a project:

 If PI > 1 then accept the project

 If PI < 1 then reject the project

Example 1:

Company C is undertaking a project at a cost of N50 million which is expected to generate

future net cash flows with a present value of N65 million. Calculate the profitability index.

Solution Profitability Index = PV of Future Net Cash Flows / Initial Investment Required
Profitability Index = N65M / N50M = 1.3

Net Present Value = PV of Net Future Cash Flows − Initial Investment Required Net Present
Value = N65M - N50M = N15M.

The information about NPV and initial investment can be used to calculate profitability index
as follows:

Profitability Index = 1 + (Net Present Value / Initial Investment Required) Profitability Index
= 1 + N15M/N50M = 1.3

Profitability index is sometimes called benefit-cost ratio too and is useful in capital rationing
since it helps in ranking projects based on their per dollar return.
It is sometimes called Benefit Cost Ratio or Present value index. It is calculated by taking the
present value of cash inflows divided by the present value of cash outflows.
The criterion for project acceptability is B/C > 1; that is, the discounted project benefits
should be greater than the discounted project costs. As with the NPV, all non-mutually
exclusive projects meeting this criterion should be pursued. Note that all of the projects with
a B/C > 1 will also have NPV > 0. However, the ranking of projects may be quite different
under the two criteria.
What should be done when the NPV and the B/C result in conflicting recommendations for
choosing among a set of mutually exclusive projects? In other words, what if two mutually
exclusive projects are ranked differently by these two criteria – one having the higher NPV
and the other having the higher B/C ratio? The answer will generally be the project with the
higher NPV. The project with the higher NPV will generally have higher capital
requirements, but, assuming that the cost of this capital has been properly accounted for, the
capital required by this project will be well-invested. Keep in mind, however, that the
financial analysis seldom captures all of the relevant information about the projects under
consideration, and these financial criteria are usually not be the sole factor in selecting a
preferred alternative. In ambiguous cases where different financial criteria point toward
different conclusions, the factors not included in the financial analysis may tip the balance
toward one project or the other.
Other decision criteria are to accept project with profitability Index (PI) greater than one.
Using this criterion, projects will be ranked from the one with highest PI down to one with
the lowest, and then project would be selected in the order of ranking up to the point where
the budget is exhausted.
Example: Assume that Mina PLC, a financial analyst, is doing a consulting work for
evaluating the two projects given below. The projects costs Br. 500 million each and the
required rate of return for each of the projects is 12%, the projects’ expected net cash flows
are as follows:

Year Project I Project II

0 (500) (500)
1 325 175
2 150 175
3 150 175
4 50 175
Required:

1. Calculate each of the project’s payback, net present value( NPV) and Internal
rate of return (IRR)
2. Which project or projects should be accepted if they are independent?
3.6 Socio-economic analysis
3.7 Sensitivity analysis
3.8 Project appraisal
The project appraisal is the process of critical examination and analysis of the proposal in
totality. The appraisal goes beyond the analysis presented in the feasibility report. At this
stage, if required compilation of additional information and further analysis of project
dimensions are undertaken. At the end of the process an appraisal note is prepared for
facilitating decision on the project implementation.
The appraisal process generally concentrates on the following aspects.
• Market Appraisal: Focusing on demand projections, adequacy of marketing infrastructure
and competence of the key marketing personnel.
• Technical Appraisal: Covering product mix, Capacity, Process of manufacture engineering
know-how and technical collaboration, Raw materials and consumables,
Location and site, Building, Plant and equipment’s, Manpower requirements and Break-even
point.
• Environmental Appraisal: Impact on land use and micro-environment, commitment of
natural resources, and Government policy.
• Financial Appraisal: Capital, rate of return, specifications, contingencies, cost projection,
capacity utilization, and financing pattern.
• Economic Appraisal: Considered as a supportive appraisal it reviews economic rate of
return, effective rate of protection and domestic resource cost.
• Managerial Appraisal: Focuses on promoters, organization structure, managerial
personnel, and HR management.
• Social Cost Benefit Analysis (SCBA): Social Cost Benefit Analysis is a methodology for
evaluating projects from the social point of view and focuses on social cost and benefits of a
project. There often tend to differ from the costs incurred in monetary terms and benefits
earned in monetary terms by the project SCBA may be based on
UNIDO method or the Little-Mirriles (L-M) approach. Under UNIDO method the net
benefits of the project are considered in terms of economic (efficiency) prices also referred to
as shadow prices. As per the L-M approach the outputs and inputs of a project are classified
into (1) traded goods and services (2) Non-traded goods and services; and (3) Labor. All
over the world including India currently the focus is on Economic Rate of Return (ERR)
based on SCBA assume importance in project formulation and investment decisions.
Chapter Four: Project Implementation, Monitoring and Evaluation
4.1 Project Administration
Project administration refers to the support, planning, documentation, time recording, cost
monitoring, billing and evaluation done during a project. It is the effective running and
maintenance of the project resources.
Various activities involved in project administration include managing human, material,
financial and logistical resources of a project. Project administration delivers not only key
performance indicators, but also a current overview of the project status, progress, costs and
budgets. It is a key link in the chain of disciplines required for project success, and like any
chain, one weak link can spell disaster.
1.5 Importance of Project Administration
Project administration is necessary to:
 Avoid wastage, as a project requires huge investments
 keep in check the loss in any project, as it will have direct and indirect impact on the
society
 prevent failure in projects
 adjust with the changes of the project activity in future
 get acquainted with the changing technology during project execution
 control the consequences of negativity in problems related to the project, which
could be very serious
 control the effects of changing economic conditions on the project

1.5.1 Benefits of Project Administration

Project administration allows orderly and accurate purchase and procurement of equipment,
payment of bills, and preparation of financial reports. It facilitates making timely requests for
resources in order to avoid unnecessary breaks in the implementation of the project. It allots
sufficient time for carrying out technical and scientific tasks in the project.

1.6 Project Manager

Project manager is responsible for implementing the proposal as planned and for solving
possible problems that may arise. He has the full responsibility and authority in successfully
completing a project. Selection of project manager should be based on his or her leadership
skills, commitment to the project, availability, and the ability to facilitate smooth
implementation of the project. Project manager oversees the hiring process and work of all
other contractors involved in the project.
He or she represents company’s interests in controlling costs and balancing the tendency of
engineers and contractors to direct the project to their advantage. The success of a project
depends on the skills and character of project manager. For example, contract project
manager knows how to work with engineers, contractors, and vendors; and who has worked
on similar projects.
1.7 Project Administrator
A project administrator is an official, who has the power to receive and handle funds. He
checks the day-to-day operation during a project. They have full authority towards managing
project resources.
A project administrator is responsible for owning the project management processes. This
includes understanding project goals, deadlines, and financial boundaries. They can best
allocate resources, and manage benchmarking, scheduling project deadlines, and general
coordination. The most common fields that project administrators work in are construction,
real estate, information technology, business accounting and so on.. The project administrator
usually reports to a project manager or director.
4.2 Project organization, planning and implementation
Planning for Implementation
Implementation is the process of turning the system over to the user.
The two prime activities in implementation are:
(1) Installing the system in the user’s environment and
(2) Training the user to operate the system.
Plans and resources for the implementation stage must be developed in advance so that
implementation can begin as soon as system fabrication is complete.
Once the detailed planning and risk assessments have been carried out, we are ready to bring
together our implementation plan.
A typical implementation plan, including diagrams and charts where appropriate, will
contain:
A description of the background to the project
→ its goals and objectives in terms of intended outputs and/or outcomes
→ the resource implications (budget, personnel – including any training requirements–and
facilities)
→ the project schedule
→ how action will be taken and by whom
→ a description of how the project will be managed
→ the reporting and review arrangements
→the evaluation plan – how success will be measured
→ the risks and contingency plans.
Getting Organized
In order to succeed in project implementation we need basic skills and knowledge on getting
organized, building and defining team responsibilities, motivating and preparing project
teams, and resourcing the project.
Getting organized is the first step in bringing together the right combination of human,
physical and financial resources to successfully undertake planned activities.
Organizing is the means by which:
→ the right things are done (what)
→ in the right place (where)
→ at the right time (when)
→ in the right way (how)
→ by the right people (by whom).
Building & Defining Team Responsibilities
Though implementation action comes next to project plan this does not mean that project
team will start working on project tasks as soon as the plan is complete. If there are a number
of different types of project team, they may start and finish tasks at different times.
Hence, when the work of one project team depends on another having completed in time, the
relationships between the people in the teams can have a profound influence on the process,
with the potential to add considerable value or cause considerable risk.
While the implementation plan is being prepared, the contractor accumulates materials to
enable the user to learn about the system and how to operate and maintain it.
Target Dates
The overall plan will clearly indicate the start dates for each group of activities, or each task.
A useful way of focusing activities on achieving outcomes is to provide ‘milestones’; that is,
clear dates for completion of stages and of final outcomes.
Target dates ensure that progress is being made towards attaining project outputs and
purposes at regular intervals during a project’s life. When the last milestone is reached, we
say that the project has been completed.
Coping with Risks and Conflicts
It is clear that when individuals work in team there might be some misunderstandings and
uncooperative behavior. Many firms apply Performance Management Processes as a tool to
control misunderstandings and uncooperative behavior.
The first informal process is face-to-face contact with the person misbehaving. However, if
such unpleasant behavior continues to disrupt progress more formal procedure is needed to
bridge the gap in understanding and minimize project risk.
Conflict is a risk to the success of the project, but it can be managed like any other type of
risk – in a controlled manner.
From the beginning to the end project managers need to identify the risks, analyze them,
develop a risk mitigation plan, and then monitor the risks.
Motivating and Preparing Project Teams
The ability of project team to perform tasks effectively as a group determines the project’s
outcome. More importantly, motivation is important at the start-up of a project. In resourcing
the project it may be useful to build in a reward system that helps to motivate project team
members.
How to Keep Project Team Motivated?
Take the time to meet with and listen to team members. Provide teams with specific and
frequent feedback about their performance, and support them in improving their performance.
Recognize, reward and promote high performance; deal quickly with poor performance so
that they can improve and learn from mistakes.
Provide information on how the organization has achieved or failed to achieve its goals.
Involve teams in decisions, especially those decisions that affect them.
Give members of the team the opportunity to grow and develop new skills.
Provide team members with a sense of ownership in their work and their working
environment. Strive to create a work environment that is open, trusting and fun. Encourage
new ideas, suggestions and initiatives.
Celebrate individuals’ successes and take time for morale building, team meetings and
activities.
Resourcing the Project
Project works are usually disrupted if the necessary materials and equipment are not readily
available. There is, more direct links between costs and outcomes can be established by
conferring (talking) responsibility to achieve an outcome within the budget, which in turn
reduce the potential for people to hoard resources against possible contingencies.
The basic process of resourcing a project includes the following steps:
 Identify what is to be achieved
 Identify the skills and skill types required
  Identify the people available
 Assess their competence
 Identify any training required to overcome any deficiencies in skill levels
 Negotiate with the resource providers
 Ensure that appropriate facilities and equipment are available.
While the implementation plan is being prepared, the contractor accumulates materials to
enable the user to learn about the system and how to operate and maintain it.
◙ Simple systems require only a brief instruction pamphlet (guide) and a warranty.
Complex systems require much more, such as:
● Lengthy manuals for procedures, system operation, repair, and service;
● Testing manuals;
● Manuals for training the trainers;
● training materials and simulators; and
● Schematics, drawings, special tools, servicing, and support equipment.
Much of the information for these manuals is derived from documentation accumulated
during the design stage. The plans to install the system must also be finalized.
The project team must develop an implementation strategy which addresses:
1. Activities for converting from the old system to the new system.
2. Sequencing and scheduling of implementation activities.
3. Acceptance criteria for the new system.
4. The approach to phasing out the old system and reassigning personnel.
The final implementation plan should contain:
→ A user training plan and training schedule;
→ System installation plans (for installation, check out, and acceptance of all central and
remote systems);
→ site preparation requirements and schedules (addressing security, access, power,
space, equipment, etc.);
→ a conversion plan for phasing the old system out and the new system in; and
The project manager:
♦ coordinates preparation of the implementation plan,
♦making sure that all key user and contractor participants are involved or kept
informed;
♦ make sure that activities are scheduled, budgeted, and adhere to the project plan; ♦make
sure that approvals are obtained; and
♦make sure that clear agreement is reached on conditions governing project termination.
An Overview of Project Planning
Project planning involves a series of steps that determine how to achieve a particular
community or organizational goal or set of related goals. This goal can be identified in a
community plan or a strategic plan. Project plans can also be based on community goals
or action strategies developed through community meetings and gatherings, tribal council or
board meetings, or other planning processes. The planning process should occur before you
write your application and submit it for funding.
Project planning:
 Identifies specific community problems that stand in the way of meeting community
goals.
 Creates a work plan for addressing problems and attaining the goals.
 Describes measurable beneficial impacts to the community that result from the
project’s implementation.
 Determines the level of resources or funding necessary to implement the project.
Why is project planning important?
Project Planning helps us to:
think ahead and prepare for the future clarify goals and develop a vision identify issues that
will need to be addressed choose between options consider whether a project is possible make
the best use of resources motivate staff and the community assign resources and
responsibilities achieve the best results
Project Planning helps to eliminate:
Poor planning overambitious projects unsustainable projects undefined problems unstructured
project work plans
5.2 STEPS IN PROJECT PLANNING
Once key members of the project team have been assembled, they begin preparing the
detailed project plan. The plan includes:-
1. Project objectives, requirements, and scope are set. These outcome elements specify
project end items, desired results, and time, cost, and performance targets.
The scope includes specific acceptance requirements that the customer uses to determine
acceptability of results or end items.
2. The specific work activities, tasks, or jobs to achieve objectives are broken down, defined,
and listed. (What?)
3. A project organization is created specifying the departments, subcontractors, and managers
responsible for work activities. (Who?)
4. A schedule is prepared showing the timing of work activities, deadlines, and milestones.
(When, in what order?)
5. A budget and resource plan is prepared showing the amount and timing of resources and
expenditures for work activities and related items. (How much and when?)
6. A forecast is prepared of time, cost, and performance projections for the completion of the
project. (How much time is needed, what will it cost, and when will the project be finished?)
These steps need to be followed each time because every project is somewhat unique,
requires different resources, and must be completed to specific time, cost, and performance
standards to satisfy users’ requirements.
Initiating the Planning Process
Project planning begins with the formation of a local project planning committee or group.
Whenever possible, tribes and organizations should use a team approach to plan new projects
which involves staff, community members, community or organizational leadership, and a
grant writer or consultant if necessary. The committee members play an important role in
keeping the project planning process on track while also ensuring everyone has the
opportunity to participate. The committee can organize meetings, conduct surveys, gather
and analyze information, and meet with other agencies and organizations. This team will
develop the project plan and use it to write the different parts of the application. Generally,
you want to spend approximately 80% of your time planning your project and 20% of your
time writing and packaging the grant application.
Once your team is in place, the planning process generally begins with an assessment of
community problems and issues involving various methods to gather community input.
Based on information gathered, project developers can identify problems and issues or
interests common to all members of the community to begin the process of setting
community priorities.
Perhaps one of the most daunting aspects of project planning is ensuring community
involvement, because it requires the knowledge and skills necessary to set up and conduct or
facilitate effective planning sessions, large meetings, and presentations. Public meetings are
essential to the development of a project with broad grassroots support. Meetings should be
held regularly throughout the planning process. Properly facilitated meetings provide a great
way to gather traditional, cultural, and local knowledge. They also serve as a means to
receive input on goals, objectives, and activities in order to determine ways to best prioritize
them.
Using the Community Process

A large part of guaranteeing community involvement will depend on how you utilize and
develop your community’s community process, or the way in which a community or
organization involves its members in community’s community process, or the way in which a
community or organization involves its members in the decision-making process. As stated
above, the public process should include the many different perspectives that exist in the
community, as this will help build unity around the project.

4.3 project monitoring and evaluation

The basis of project monitoring systems is to track actual progress against
planned progress at any given time. This covers financial progress (monitoring of
actual expenditure against budgeting expenditure) as well as the progress of project
activities. Monitoring systems should be considered alongside the implementation
plan because it is the targets set out in this plan which forms the targets for
monitoring. The whole system is therefore often referred to as an “integrated
planning, implementation and monitoring system” (IPIMS).

Monitoring systems should:

 At all times be concerned with future progress.

 Be simple and cost effective.

 Be able to detect deviations quickly and accurately.

 Be verifiable.

When designing a monitoring system, the project formulation should keep the
following points in mind:
  Identify key personnel or informants for the monitoring information.
These could include line mangers, accountants, contractors and suppliers etc.

 Indicate frequency of data/information collection time. Remember that data

is only effective once it has been processed.

 Identify responsibilities for data processing. Assign also responsibilities to

act on the result of these data.

 Try to attain the right combination of speed and accuracy. Sometimes a

trade-off has to be made between the two, with information that is extremely
accurate leading to delays in taking effective remedial action.

 Make sure that the monitoring system only intends to processes that data
which is necessary. Monitoring information increases workload so it is
important that only the most essential data is requested for processing.

Monitoring systems in themselves are ineffective unless they are linked to an effective
control system which will allow the manger to take swift and effective action to
remedy any deviations from the implementation plan.

Systems concerned with implementation measure the project’s effectiveness in

converting inputs to outputs; while monitoring systems concerned with operations
measure the project’s effectiveness in converting outputs into immediate and
wider objectives.

Information acquired through monitoring systems can be divided into three categories:

 Monitoring of physical progress

 Monitoring of financial progress

 Monitoring the quality of project outputs.

MONITORING PHYSICAL PROGRESS:

 The primary purpose of physical progress monitoring is to ensure whether project
activities are on schedule. This can be achieved through milestone (target)
monitoring and time chart monitoring.

Milestone monitoring involves the use of project milestones which were identified as
part of the project implementation plan. The actual date on which these milestones
were reached can be entered in table form or on the Gantt chart. Milestone monitoring
provides a retrospective record of project progress, but it is unable to provide us with
information about activities which are still in progress.

Time chart monitoring is a method which is used to anticipate whether or not

milestones will be reached on schedule.

When dealing with physical progress of an activity there are three possible scenarios:

 Activity outputs can be quantified as a single number. This is relatively

simple to monitor. for example, if the activity was to print a certain number of
textbooks then both the physical target and progress to date can be expressed in
terms of this single number.

 Activity outputs can be measured and valued. This is the case with the
construction of buildings and roads. progress towards meeting physical targets
should be expressed as:

When dealing with direct labor the planners must be careful not to equate the
value of the work done with financial spending. The planners should devise
methods to measure actual physical progress.

 Activity outputs cannot be directly valued. This is the case in activities such
as training or in supply-only contracts. These activities should use milestones
to mark the beginning and end of each separate activity phase. if this is not
possible, physical progress can be expressed as:

Time spent to date X 100(%)

Total time to complete

 This can be problematic because the time taken may not bear any relation to the
actual amount of physical progress towards activity completion. Once physical
progress has been monitored for all ongoing activities, it is possible to plot this
information against the implantation plan in the form of a bar chart.

MONITORING FINANCIAL PROGRESS:

This involves comparing actual expenditure against the financial plan (budget)
produced as part of the implementation plan. The project must therefore have a cost
reporting system in place to enable a comparison of actual and predicted costs. It is
unwise to rely on existing accounting systems to provide this information as these
systems are liable to be slow and to categorize expenditure using different methods to
those desired by the project manger.

As many authors note “public sector mangers will need to take particular care that
they keep a measure of overall spending of the project against overall budget……
managers are not able to spend above each year’s authorized budget, so that cost over-
runs are met by delaying implementation, or reducing the scope of the project to
compensate.”

Once the manger has access to accurate cost data, it is possible to utilize this
information in the process of project cost control. Using the following relationship
can do this:

Cost of work to date = Cost of work remaining

Value of work to date Value of work remaining

The information gained through this calculation can then be entered in tabular form.

MONITORING THE QUALITY OF PROJECT OUTPUTS:

This involves ensuring that outputs are delivered according to specification. This is
normally done through a system of direct inspection and supervision. A formal
agreement between the implementing agency and the project owner that project
outputs are satisfactory is known as ‘signing-off’. Each project will have its own
quality assurance features in operation and it is important that the quality control
aspect is not overlooked during project design.

EVALUATION:

Evaluation is the structured process by which a project activities and achievements

are assessed and understood. It provides information for those who are involved in the
project such as managers, promoters, funders and/or policy makers. Evaluation in
addition to quantitative questions attempts to answer also qualitative questions.
Evaluation could be ongoing (mid-term), terminal or ex post. A good evaluation
system in a project from the outset may assist the project implementers in identifying
difficulties that hinder the progress as planned and avoid repeating mistakes in future
endeavors. It is therefore, crucial to identify the main actors for the evaluation
exercise during the project formulation. The preliminary function of evaluation after
project completion is to use data on the performance of projects in such a way that
new projects can learn from experience.

Although project evaluation is not a legal requirement in the upcoming period 2014-
2020, it is an important tool to measure your project performance and to demonstrate
the achievements of your project. It helps you answer questions such as ‘Is my project
still on track?’, ‘Is my project delivering results as planned’, or ‘What is working well
in my project’. If your project is not delivering results as expected, project evaluation
can be a useful tool that can assist you in adapting activities.

Altogether an evaluation should be seen as a learning exercise: “a culture that supports

learning and that is able to derive positive lessons for the future from problems, or
even failures, as well as from success”.5

Before starting an evaluation, it is necessary to find out about the specifications,

requirements and guidelines of your programmes related to project evaluation. It could
be that your programme has issued specific guidelines for a project evaluation.
An evaluation can be carried out during the implementation of a project; e.g., to find
out if the project is performing as planned, or at the end of the project; e.g., to present
the achievements of the project.

If you plan to carry out a project evaluation, you should first ask yourself why you
want to implement the evaluation. Evaluations should never be carried out without
having a clear picture of why and for whom the evaluation is being done.

Purpose of evaluation

Accountability: Demonstrating how far a project has achieved its objectives, how
well it has used its resources, and what has been its impact: What did your project
achieve? How successful has your project been? Has it met its targets? Did you spend
the money as planned? Has the money been spent effectively and efficiently, and with
what impact?

Implementation Improving the performance, management and effectiveness of the

project: How efficiently did you implement your project? Are the management
arrangements working efficiently? Are partners as involved as they need to be? Are
programmes properly targeted in terms of eligibility? Is the time plan being adhered
to?

Knowledge production

Understanding what works (for whom), why and in what contexts. What have we now
learned about what works? Is this an efficient way of achieving goals, or are there
alternatives? What evidence is there regarding the sustainability of the project?

Planning / efficiency

Ensuring that there is a justification for the project, and that resources are being
efficiently deployed: Was your project worth implementing? Is this the best use of
public money? Are there alternative uses of resources that would yield more benefit?
Is there equivalence between the costs incurred and the benefits that followed? Did
you spend the money in an efficient way?
Institutional strengthening

Improving and developing capacity among project participants and their networks and
institutions. Are project partners and local communities sufficiently involved in your
project? What can be done to increase participation and develop consensus? Are the
project mechanisms supportive and open to 'bottom up' feedback6?

Scope and object of the evaluation

Defining the scope of your evaluation should start with the question “What is to be
evaluated?” It is recommended to adopt a relatively strict definition of the scope of the
evaluation, in order to reach concrete conclusions and recommendations. For example,
the best way to define the focus and the evaluation questions is to consider practical
constraints such as time, human resources and budget (e.g., How much money does
the project have for the evaluation? How much time is available to implement the
evaluation? Will the evaluation be done by an internal or external evaluator?)

Inadequate stakeholder involvement is one of the most common reasons programmes

and projects fail7. Therefore, it is very important that you involve relevant
stakeholders in the planning, monitoring and evaluation process. The crucial point is
to identify the relevant stakeholders that have an interest in your project: they may
make decisions, participate in project activities, or are themselves affected by projects
activities.

Stakeholders, programme managers and policy makers, potential project partners and
partners should be involved in the evaluation from the earliest stages, whenever
possible. This will ensure that the evaluation design and plan will include their
priorities. This will also ensure that they feel some sense of ownership of the outputs
of the evaluation, and are more likely to put them to use.

Defining evaluation questions

Through defining the evaluation questions, the project can focus on different aspects
of the project implementation: · What has the project accomplished? What change did
the project bring? (Descriptive questions intended to observe, describe and measure
changes.) · How and to what extent is that which occurred attributable to the project?
(Causal questions which strive to understand and assess relations of cause and effect.)
· Are the results satisfactory in relation to targets? (Normative questions which apply
evaluation criteria.) · What will happen in the future because of the project? For
example, will the project create positive effects for the environment? (Predictive
questions, which attempt to anticipate what will happen as a result of planned
interventions.)

Evaluation questions refer to the main evaluation criteria: · Relevance: To what extent
are the project’s objectives justified in relation to the needs of the programme area? ·
Effectiveness: To what extent have the objectives been achieved? Has the project
produced the expected effects? Could more effects be obtained by using different
instruments? · Efficiency: Have the planned outputs been achieved at the lowest
costs? · Utility: Are the expected or unexpected effects satisfactory from the point of
view of direct or indirect project partners? Did the project have an impact on the target
groups in relation to their needs? · Sustainability: Are the results, including
institutional changes, durable over time? Will they continue if there is no more
funding?

When selecting evaluation questions it is important to ensure that these questions are
answerable with the available data. Another important consideration is how the
evaluation results will be used, by whom, and for what purpose.

Develop a Project Evaluation Plan

A project evaluation measures the effectiveness and efficiency of a project, and

determines the level of achievement of the project objectives. Findings from an
evaluation will also help a tribe or organization plan for the future, as it can identify
additional or persistent problems that need to be solved. This is why the project cycle
is a continuous process.

Outcomes and Impacts

There are different components involved in project evaluation. Outcomes are the
measurable changes that can be observed as a result of the project’s successful
completion. These are the measurable results and benefits that will be observable
within the targeted population once the project is complete, determining the extent to
which the identified problems were reduced, resolved, or eliminated. The results and
benefits measure the progress toward achieving project objectives. Outcomes are the
short-term and medium-term effects of the project on the community. Examples of
outcomes include new knowledge, increased skills, increased understanding, and
increased participation in after-school activities.

Impacts differ from outcomes in that they are the lasting effects of the project, as seen
years down the road from the project’s completion. Impacts measure the change that
can be specifically associated to a project’s implementation and after project
completion. In other words, they measure the extent to which the project achieved its
goal. Examples of impacts include increased quality of life, decreased incidence of
disease or infection, and higher numbers of students completing post-secondary
education. The relationship of outcomes and impacts to the project is:

An evaluation plan is the next key element for the successful implementation and
management of a project. An evaluation plan describes the process and provides the
tools to measure progress in implementing the project; it also assesses how effectively
the project addressed problems and achieved its objectives. It is important to develop
an evaluation plan during the project planning process prior to implementing your
project and to include it in your application. This will show the application reviewers
that there is a system in place to measure the level to which the project addresses the
identified problems, ultimately determining its cost-effectiveness.

There is no perfect or minimum number of measurements that must occur in order to

properly and fully evaluate a project’s success. Instead, each project component must
be analyzed, and decisions must be made based upon the findings. The evaluation
should be designed to track progress on each objective, completion of activities, and
dates of completion.
In designing the evaluation plan, include the following three components:

1. Impact Indicators

The objectives and project goal provide the framework for project evaluation.
Achievement of each objective is measured by its accompanying results and benefits
(outcomes). Achievement of the project goal is measured by impact indicators. The
evaluation of these indicators will measure the extent to which the desired change has
occurred. The indicators must be quantifiable and documented, and should include
target numbers and tracking systems. The evaluation will consider the indicator, the
mechanism for tracking the indicator and the target number or situation at the end of
the project period. Reference to the pre-grant status of the indicator and final target
for the indicator will greatly assist in project evaluation.

For example:

Prior to starting a language implementation project, a community had 10 fluent native

language speakers. The project spent three years teaching daily language classes to
100 community members. By the end of the project, there were a total of 27 fluent
speakers including the 10 original speakers. The project chose “number of fluent
speakers” as their project specific indicator, as measured by pre- and post-tests based
on the community’s definitions of proficiency levels. The change in fluent speakers
was therefore.

2. Methods/Procedures

The project is likely to have several objectives to evaluate, and several different
methods of evaluation might be needed.

 What methods will be used to measure the results and benefits?

 What records will be maintained?
 The evaluation plan must include the method(s) used to determine whether the
objective was accomplished, and whether the desired change actually occurred.
Reporting methods are a crucial part of your evaluation plan and the frequency and
responsible parties must be specified.

 How many total measurements will be taken?

 How frequently will the data be collected and by what means?
 What will be done with the data?
 How will the data be analyzed and what form will the report take?
 What is the dissemination plan for the report (i.e., to whom will it be
distributed)?

PROJECT SUSTAINABILITY:

A project is sustainable if its net benefits continue throughout the life of the project at
a level sufficient to meet the predetermined objectives. Sustainability is, therefore, the
ability of a project under consideration to continue operation or provision of services
and/or production without interruptions for the period under design. It also includes
the managerial and technical capacity and capability of the project personnel in the
operation and running of the project to meeting its desired objectives.

The aim of any development project is to meet its predetermined objectives/goals on

sustainable basis. If the project formulators fail to consider what will happen upon
completion of the project’s implementation phase, then however well implemented,
the project is liable to encounter serious problems in providing the required services
and/or production.

Full coverage and exhaustive analysis of project aspects such as: demand/need,
technical, environmental, social, institutional, financial, and economic analyses
are critical for the sustainability of a project under consideration. Furthermore, risk,
uncertainty and distributional analysis are vital to ensure the sustainability of a
project. Project planning, therefore, should also need focus on project handover,
operations, maintenance and termination arrangements so that implementation and
operation phases are smooth and clear.
To ensure that the transition between the project’s implementation and operation
phase is as smooth as possible consider the following strategies in the formulation of
the proposed project:

 Ensure that project handover, operation and termination arrangements are

properly planned and responsibilities identified from the outset.

 Ensure that the handover operation and commissioning period is smooth in

order to use newly created facilities and utilities to use them in the most
efficient and effective manner.

 Ensure that project handover procedures have included acceptance tests,

relevant safety and quality standards set by the project or responsible authority.

 Ensure that the process of project operation is properly monitored and changes
to be achieved during operation are evaluated.

 Ensure that adequate maintenance facilities and operation arrangements are in

place for the proposed technology or system of operation.

 Ensure that the institutional and financial arrangements for project operations
should be clearly outlined at the project formulation stage.

 Ensure that adequate financial provision has been made for maintenance
needs, which may arise during operations.

 Examine thoroughly that financing arrangements for future operation,

especially with relation to the funding of recurrent costs.

 Ensure that the body responsible for project operations should have adequate
organizational capacity in order that it will be able to sustain operations.

 Ensure that proper management information system is in place with practically

applicable tools to successfully implement and operate a project.

 Ensure that the project’s technical design utilizes technology, which is easy to
maintain within the environment in which it will operate.
Develop a Sustainability Strategy

A sustainable project is one that can and will continue without additional Federal
funds, and will therefore contribute to long-term success and impacts within your tribe
or organization. However, sustainability is not simply about generating new grant
dollars; it also involves outlining a specific strategy and action plan for continuing
your project. Significant attention is placed on this section of your application
because the funding source does not want the project to fail once support is complete.
Some projects lend themselves more to sustainability strategies, however all projects
include benefits to the community that can be continued after implementation is
complete.

A sustainability plan is a narrative description of how you plan to continue your

project after Federal funding is complete. Perhaps the first question to ask is:

 How can we use available, existing resources to continue our project’s benefits
and achieve our long-term vision?
 Will other outside funding be needed or can the project processes be absorbed
into the organization’s daily operation without placing a burden on the staff?

Consider if you already have a network of supporters and potential funders in your
area. If your organization has had previous success in funding projects after their
initial funding is complete, describe these accomplishments as a background for your
sustainability plan. This shows the funder that you have a pre-established method for
sustainability. If outside resources are needed, list potential sources that should be
considered. Be sure to be specific in your sustainability plan. Does not simply state
future funding will come from “a variety of sources, including other federal funds?”
Your plan should indicate you have conducted research and have specific ideas in
mind. The sustainability plan should also provide information on how your tribe or
organization will incorporate the new project into their funding or fundraising plan
and who will be responsible for its continuation.
 Obviously, this future funding will not be in place during the writing of your
proposal, but try to think of your sustainability plan as a “wish list” or a list of
possibilities.

Below are some examples of areas for future funding:

 Organization funds: Your organization may wish or be able to provide

continuation funding for your project. Be sure to discuss this possibility during
your project planning process. Provide a letter of support or commitment from
your governing body in your application.
 Continuation grants from private foundations: Funding from private foundations
can be used to support ongoing projects and programs. Provide information on
how your project fits into their grant programs.
 Other Federal funds: There are numerous other federal agencies that provide
continuation funding for community-initiated community development projects.
Provide information on how your project fits into their grant programs.
 State funds: There are also state agencies that provide continuation funding.
Provide information on how your project fits into their grant programs.
 Unrestricted revenue: If your project will generate revenue, either through sales of
goods, fees for service, or some other means, you can use the revenue generated
after the grant ends to sustain your project. Include a revenue plan or fee scale in
your application outlining your methods. (Bear in mind you must use any program
income (revenue) generated during the grant period prior to spending down
Federal funds. However, future revenue can be used to sustain the project).
 Colleges/Universities: Many colleges or universities provide funds for ongoing
projects and programs, or will supply project staff in the form of degree candidates
or research assistants. Include a description of the institution and other projects it
has funded similar to yours, or if possible provide a letter of support or
commitment in your application.
 Partnerships: Looking at local and regional partners to assist in continuing the
project impacts in your community after funding has ended is a potential method
for sustainability.
Finally, keep in mind that a firm, long-term commitment of leveraged funds can be a
very effective strategy on which to build a project sustainability plan, even for projects
that “will be completed” at the conclusion of Federal funding. For example,
applications for projects that focus on drafting environmental codes often indicate that
the project will be

completed at the end of Federal funding and will not need to be sustained. Instead, the
applicant could include a sustainability plan that describes how those codes will be
used to further benefit the community through ongoing tribal court and natural
resources staff operations. In other words, a long-term commitment of leveraged
resources.