Technical Analysis

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4.1 Overview of Feasibility study
 Feasibility study is an analysis of the ability to complete a
project successfully, taking into account legal, economic,
technological, scheduling and other factors..
 It allows project managers to investigate the possible negative
and positive outcomes of a project before investing too much
time and money.
 For example, if a private school wanted to expand its campus
to alleviate overcrowding, it could conduct a feasibility study to
determine whether to follow through. This study might look at
 where additions would be built
 how much the expansion would cost
 how students' parents feel about the proposed expansion
 how students feel about the proposed expansion
 what local laws might affect the expansion
 Business plan Vs Feasibility study

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4.1 Overview of Feasibility study
Reasons to Do a Feasibility Study
 Give focus to the project and outline alternatives by
narrowing them
 Surface new opportunities through the investigative
process
 Identify reasons not to proceed
 Enhance the probability of success
 Provide quality information for decision making
 Help to increase investment in the company
 Help in securing funding from the sources

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4.1 Overview of Feasibility study
Reasons given not to do a Feasibility
Study
 We know that it is feasible as an existing business is
already doing it
 Why do we do another feasibility study when one was done
just a few years ago?
 Feasibility studies are just a way for consultants to make
money
 The market analysis has already been done by the business
that is going to sell us the equipment
 Feasibility studies are a waste of time
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 4.2 Market & Demand Analysis
Key Terms
A market is any place where the sellers can meet with
the buyers where there is a potential for a transaction
to take place.
Marketing is a business activity of presenting
products or services to potential customers in such a
way as to make them eager to buy
Market analysis is a process of assessing the level of
demand for the product or service to be produced by
the project.
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 4.2.1 Role of Market and Demand
Analysis
Market analysis usually ranks top in the sequence of
the core chapters of a feasibility study.
 Analysts who have to calculate the socio – economic costs and
benefits of a project, can only start their job, if market analyst
delivers sales forecast and market strategy.
 market analysis is obviously more ambitious and risky in
comparison to the other parts of a feasibility study, as it has to
fight with the future.
 The marketing demand and sales forecast is necessarily
subjective and vague, since, in the final end it has to deal with
the behavior of human beings

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 4.2.2 Steps In market and
Demand Analysis

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 Collection of Demand
Secondary Forecasting
Information

Situational
Characterizatio
Analysis and
n of the Market
Specification
s of
Objectives

Conduct of Market
Market Planning
Survey
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1SITUATIONAL ANALYSIS AND SPECIFICATIONS
OF OBJECTIVES
 An informal survey of what information is available in the
area
 The analyst may informally talk to the customers,
competitors, middlemen, and others in the industry
 To learn about:
◦ the preferences and purchasing power of customers
◦ actions and strategies of competitors
◦ practices of the middlemen.
 To carryout formal study after this stage, it is necessary to
specify objectives of market study at this stage.
◦ May be structured in the form of questions.

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1SITUATIONAL ANALYSIS AND
SPECIFICATIONS OF OBJECTIVES
 The objectives of the market and demand analysis may be to answer
the following questions:
Who are the buyers of the product?
What is the total current demand for the product?
How is the demand distributed temporally & geographically?
What is the break-up of demand for products of different sizes?
What price will the customers be willing to pay for the improved
product?
How can potential customers be convinced about the superiority of
the new product?
What channels of distribution are most suited for the product?
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2 COLLECTION OF SECONDARY
INFORMATION
 Benefits of secondary information
 SECONDARY SOURCES OF DATA
1. Ethiopian Economic Survey
2. Census of Ethiopia
3. Reports of Export Working Groups on Various
Industries
4. Census of Manufacturing Industries
5. Monthly Statistical Bulletin
6. Annual Survey of industries
7. Publications of Advertising Agencies

Evaluation of Secondary Information

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3 CONDUCT OF MARKET SURVEY
Census Survey
Sample Survey
Steps in a Sample Survey
 Define the Target Population
 Select the Sample Size and Sampling Scheme
 Develop the Questionnaire
 Recruit and Train the Field Investigators
 Obtain Information as Per the Questionnaire from the
Sample of Respondents
 Scrutinize, analyze and interpret the Information

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4 CHARACTERISATION OF THE MARKET
Effective Demand in the Past and Present
Production + Imports – Exports – Change in stock
level
Breakdown of Demand
Nature of Product
Consumer Groups
Geographical Division

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4 CHARACTERISATION OF THE MARKET
Price
Methods of Distribution and Promotion
Consumers
Supply and Competition
Government Policy

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5 DEMAND FORECASTING
Two main types: qualitative and quantitative
I. Qualitative (Subjective) Methods
These methods rely essentially on the judgment of
experts to translate qualitative information into
quantitative estimates
Used to generate forecasts if historical data are not
available (e.g., introduction of new product)
The important qualitative methods are:
 Jury of Executive opinion Method
 Delphi Method

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 5 DEMAND FORECASTING
A. JURY OF EXECUTIVE OPINION METHOD
 Involves small group of high-level experts and
managers
 Pool opinions of these experts
 Group estimates demand by working together
 Combines managerial experience with statistical
models

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5 DEMAND FORECASTING
A. JURY OF EXECUTIVE OPINION METHOD
Main advantages
Combine knowledge and expertise from various functional
areas
People who have best information on future developments
generate the forecasts
Main drawbacks
Expensive
No individual responsibility for forecast quality
persons with strong personalities may exercise
disproportionate influence.
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5 DEMAND FORECASTING
B. Opinions of Sales Representatives
A drawback is that salespeople may be overly
optimistic or pessimistic.

Further, they may be unaware of the broad

economic patterns that may affect demand

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5 DEMAND FORECASTING
C. DELPHI METHOD
 A form of expert opinion forecasting that uses a

series of written questions and answers to obtain a

consensus forecast.
 Experts do not meet to discuss and agree on a

forecast, eliminating the potential pitfall resulting

from using a jury of executive opinion.

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 5 DEMAND FORECASTING
C. DELPHI METHOD
 Approach

Coordinator Each expert Coordinator

Sends Initial writes response performs
Questionnaire (anonymous) analysis

Coordinator Coordinator
sends updated
No Consensus Yes
summarizes
questionnaire reached?
forecast

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5 DEMAND FORECASTING
C. DELPHI METHOD
Main advantages
Generate consensus
Can forecast long-term trend without availability of
historical data
Less expensive
Main drawbacks
Slow process
Experts are not accountable for their responses

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5 DEMAND FORECASTING
II. Quantitative (Objective) methods
 Employ one or more mathematical models that rely on
historical data and/or causal/indicator variables to
forecast demand.
Major methods include:
time series projection methods
causal models

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 5 DEMAND FORECASTING

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1. Trend Projections
Fitting a trend line to historical data points to
project into the medium to long-range
Linear trends can be found using the least
squares technique

y^ = a + bx
^ where y = computed value of the
variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Interpretation of Coefficients
 Slope (b)
 Estimated Y changes by b for each 1 unit

increase in X
 If b = 2, then sales (Y) is expected to

increase by 2 for each 1 unit increase in

time (X)
 Y-intercept (a)
 Average value of Y when X = 0

 If a = 4, then average sales ( Y) is

expected to be 4 at time 0
Least Squares Method
Actual observation
Values of Dependent Variable

Deviation7
(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1

Trend line,^y = a + bx
(error) Deviation2

Time period Figure 4.4

Least Squares Method
Actual observation
Values of Dependent Variable

Deviation7
(y value)

Deviation5 Deviation6

Deviation3 Least squares method minimizes

the sum of the squared errors
(deviations)
Deviation 4

Deviation1

Trend line,^y = a + bx
Deviation2

Time period Figure 4.4

Least Squares Method
Equations to calculate the regression variables

y^ = a + bx

xy - nxy
b=
x2 - nx2

a = y - bx
Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80 9 240
2013 4 90 16 360
2014 5 105 25 525
2015 6 142 36 852
2016 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 )
2

a = y - bx = 98.86 - 10.54(4) = 56.70

Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2The trend line79
is 4 158
2012 3 80 9 240
2013 4 90
^ y = 56.70 16 360
2014 5 105 + 10.54x 25 525
2015 6 142 36 852
2016 7 122 49 854
x = 28 y = 692 x2 = 140 xy = 3,063
x=4 y = 98.86

xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
x - nx
2 2 140 - (7)(4 )
2

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example
160 –
150 – Trend line,
Power demand

y^ = 56.70 + 10.54x
140 –
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 – Year
50 – | | | | | | | | |
2010 2011 2012 2013 2014 2015 2016 2017 2018
2. Exponential Smoothing Method
 forecasted results are modified in light of observed
errors in the past
 Requires smoothing constant ()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of past data

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 Exponential Smoothing
t = Last period’s forecast
+  (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + (At – 1 - Ft – 1)

where Ft = new forecast

Ft – 1 = previous forecast
 = smoothing (or weighting)
constant (0 ≤  ≤ 1)
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20

New forecast = 142 + .2(153 – 142)

Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
 3. Moving Average Method
 Forecasted sales for next period is the average of
sales of past periods
Simple Moving Average
 MA is a series of arithmetic means
 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over time

Simple Moving ∑ demand in previous n periods

average = n
Simple Moving Average Example
Actual 3-Month
Month Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
Weighted Moving Average
 Used when trend is present
 Older data usually less important
 Weights based on experience and intuition

∑ (weight for period n)

Weighted x (demand in period n)
moving average = ∑ weights
 Weights Applied Period
Weighted Moving
3 Average
Last month
2 Two months ago
1 Three months ago
6 Sum of weights
Actual 3-Month Weighted
Month Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
ii. Causal methods
Causal methods seek to develop forecasts on the
basis of cause-effects relationships specified in an
explicit, quantitative manner.
High-Low method
Chain Ratio Method
Consumption Level Method
End Use Method
Leading Indicator Method
Regression analysis

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 A. High-Low method
 it uses only the highest and lowest observation values of
the dependent and independent variables.
 The demand function is estimated by using these two
points to calculate the slope coefficient and the constant
or intercept.
 b = difference between the highest demand and lowest demand in the past
divided by the difference between the highest and the lowest of the
independent variable.
 a = Y-bX (take either highest or lowest observation values for X and
Y)

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 A. High-Low method
 Illustration:
The following data were about sales of a certain product and no. of
households over the past five years. Use no. of households as
determinant for demand

Year No. of households Actual sales in thousands

2012 500 120
2013 450 110
2014 600 135
2015 660 140
2016 710 162

 b = 200; a = 20,000 ; dd function: Y = 20000 + 200X

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B. CHAIN RATIO METHOD
Forecast is made by applying a series of factors called
chain ratios
E.g. A firm wants to estimate potential sales of an instant
coffee-TEMA.
 Population next year= 120,000,000
 Per capita demand of coffee = 2kg
 Proportion of coffee used at home= 70%
 Proportion of instant coffee= 40%
 Estimated long run market share of TEMA= 20%
 Average price per kg of instant coffee= Br100
What is potential sales for TEMA next year?

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C. CONSUMPTION LEVEL METHOD
This method is used for those products that are
directly consumed. This method measures the
consumption level on the basis of elasticity
coefficients. The important ones are
 Income elasticity of demand
 Price elasticity of demand

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C. CONSUMPTION LEVEL METHOD
 Income Elasticity: This reflects the
responsiveness of demand to variations in
income. It is calculated as:
 E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1] 
 Where: E1 = Income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
I1 = income level in the base year
I2 = income level in the following year

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C. CONSUMPTION LEVEL METHOD
The aggregate demand is estimated using the following
formula:
Agg dd = Proj Popn (present per capita dd) ( 1+ (per capita change in income level x Ei))

Illustration:
 Q1=120; Q2=140; I1=1000; I2=1200
 Increase in per capita income level next year = 10%
 Present per capita demand for coffee = 3kgs
 Projected population next year = 120 million
Calculate the aggregate demand for coffee next year.
Soln
Ei = 0.85
Aggregate dd for coffee next year = 390.6 million

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D. END USE METHOD
This method forecasts the demand based on the consumption coefficient of the various uses of the product.
Is mostly used for intermediate products

It involves the following steps:

 Identify the possible uses of the product
 define the consumption coefficient of the product for various uses
 project the output levels for the consuming industries
 derive the demand for the product

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D. END USE METHOD
 Illustration: Aloe Vera is used by four industries for producing different products. The Consn Coeff., the
projected output levels for these industries and the projected dd for Aloe Vera for next year are shown below.

Projected Demand for Aloe Vera

Projected
Consumption Projected Demand for
Output next Aloe Vera next year
Coefficient
year
Alpha 2.0 10,000 20,000
Beta 1.2 15,000 18,000
Kappa 0.8 20,000 16,000
Gamma 0.5 30,000 15,000
Total 69,000
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E. LEADING INDICATOR METHOD
 This method uses the changes in the leading
indicators to predict the changes in the lagging
variables.
 Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading
indicator(s) and the variable to forecast.

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F. Regression Analysis
Used when changes in one or more independent
variables can be used to predict the changes in
Sales

Most common technique is simple

regression analysis

We apply this technique just as we did in

the trend projection method example
Simple Regression Analysis
Forecasting an outcome based on predictor
variables using the least squares technique

y^ = a + bx
^ where y = computed value of the
variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
though to predict the value of the
dependent variable
 Simple Regression Analysis Example
Sales Local Payroll
(Br millions), y (Br billions), x
2.0 1
3.0 3
2.5 4
2.0 2 4.0 –
2.0 1
3.5 7 Sales
3.0 –

2.0 –
| | | | | | |
1.0 0– 1 2 Area
3 4payroll
5 6 7
Simple Regression Analysis Example
Sales in millions, y Payroll in bill, x y2 x2 xy
2.0 1 4 1 2.0
3.0 3 9 9 9.0
2.5 4 6.25 16 10.0
2.0 2 4 4 4.0
2.0 1 4 1 2.0
3.5 7 12.25 49 24.5
∑y = 15.0 ∑x = 18 ∑y2=39.5 ∑x2 = 80 ∑xy = 51.5

∑xy - nxy 51.5 - (6)(3)(2.5)

x = ∑x/6 = 18/6 =b 3= =
80 - (6)(32)
= 0.
∑x - nx
2 2

y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

Simple Regression Analysis Example

y^ = 1.75 + 0.25x Sales = 1.75 + 0.25(payroll)

If payroll next year

is estimated to be 4.0 –
Br6 billion, then: 3.25
Sales
3.0 –
Sales = 1.75 + .25(6)
Sales = Br3,250,000 2.0 –
| | | | | | |
1.0 0– 1 2 Area
3 4payroll
5 6 7
Multiple Regression Analysis
If more than one independent variable is to be
used in the model, linear regression can be
extended to multiple regression to accommodate
several independent variables
^y = a + b x + b x …
1 1 2 2

Computationally, this is quite complex

and generally done on the computer
Multiple Regression Analysis
In the previous example, assume including interest
rates in the model gives the new equation:

y^ = 1.80 + 0.30x1 - 5.0x2

And if interest rate for the next year will be 12%, area
payroll is Br6 billion
Sales = 1.80 + 0.30(6) - 5.0(0.12) = 3.00
Sales = Br3,000,000
UNCERTANITIES IN DEMAND
FORECASTING
Data about past and present markets.
Lack of standardization
Few observations
Influence of abnormal factors
Methods of forecasting
Inability to handle unquantifiable factors
Unrealistic assumptions
Excessive data requirement

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UNCERTANITIES IN DEMAND
FORECASTING
Environmental changes
Technological changes
Shift in government policy
Developments on the international scene
Discovery of new source of raw material

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COPING WITH UNCERTAINTIES
Conduct analysis with data based on uniform and
standard definitions.
Ignore the abnormal or out-of-ordinary
observations.
Critically evaluate the assumptions
Adjust the projections.
Monitor the environment.
Consider likely alternative scenarios.
Conduct sensitivity analysis

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6 Market Planning
Marketing plan is product specific, market specific , or
company-wide plan that describes activities involved in
achieving specific marketing objectives within a set time
frame.

A marketing plan shows the specifics of how you will

market or attempt to sell your product or service.

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6 Market Planning
It has the following key components
 1. Current marketing situation: market situation, competitive
situation, distribution situation, macro-environment, etc.
 2. Opportunity and issue analysis: SWOT analysis
 3. Objectives: clear-cut, specific, and achievable.
 4. Marketing strategy: Target segment, positioning, product line,
price, distribution, sales force, promotion,etc.
 5. Action program: what will be done, when it will begin or be
completed, who will accomplish the tasks, what financial resources
are required, etc

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 4.3 Production Program and Plant
capacity
4.3.1 Production Program
define the levels of output to be achieved during specified
period
should indicate the basic products, by – products, and
wastes during the process.
It should:
 be directly related to the specific sales forecasts.
 Consider losses of production within the production plant site, in
storage, transportation and by warranty service.
 Take int0 account level of technology absorption

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4.3.1 Production Program
The production program (capacity utilization) changes in time
during project life.
Initially (for the first one or two years of operation) small
capacity utilization is often achieved.
 market is not ready to acquire large amounts of new product
 the technological difficulties obstruct the full – capacity operation of the
equipment.
 The determinants of a production program during the initial
production years vary considerably from project to project.
 Single – product – continuous process manufacture: production problems are
more critical
 Multiple – product – continuous process production: both production and sales
problems
 Batch/job order production: Sales problems are more critical
 Assembly/mass manufacture: sales problems in relation to price are critical

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 4.3.2 Plant Capacity
is the maximum output rate of a production or
service facility

Importance of Capacity Decisions

Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management

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4.3.2 Plant Capacity
Factors determining Capacity decision:
 Technological Requirement: Minimum Economic size
determined by the technological factor
 Input Constraints: constraints on the availability of certain inputs.
 Investment Cost: with no serious input constraint, cost per unit
of capacity decreases as the plant capacity increases.
 Market Conditions:
 If very strong, higher capacity is preferable.
 If very uncertain, start with small capacity
 Resources of the Firm: Managerial and financial

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 4.3.2 Plant Capacity
Types of plant capacity:
1. Design capacity (Nominal Maximum Capacity)
 Maximum obtainable output under ideal conditions
 Can only be achieved with unusual working conditions.
 Example: A bakery can make 30 custom cakes per day when
pushed at holiday time

2. Effective capacity (Feasible Normal Capacity)

 Maximum output rate under normal (realistic) conditions
 The output to be achieved under efficient operating condition.
 Example: On the average this bakery can make 20 custom cakes
per day

 Actual output
 Rate of output actually achieved--cannot exceed effective capacity.
This is effective capacity minus unforeseen problems, such as
machine breakdown, union problems, and so on.

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4.3.2 Plant Capacity

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

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 4.3.2 Plant Capacity
Example :
 SIF Bakery has a plant for processing breakfast rolls. The
facility has an efficiency of 90%, and the effective capacity
is 80%. Three process lines are used to produce the rolls.
The lines will operate 7 days a week and three 8-hour shifts
per day. Each line is designed to process 120 standard rolls
per hour.
 Design capacity = 60,480 rolls per week
 Effective capacity = 48,384 rolls per week
 Anticipated production = 43,546 rolls per week

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4.3.2 Plant Capacity
Capacity and Scale
 Economies of scale: cost advantages exploited by expanding the
scale of production in the long run. Where the cost per unit of output
drops as volume of output increases
 Spread the fixed costs of buildings & equipment over multiple
units
 allow bulk purchasing & handling of material
 Finding process advantages
 Diseconomies of scale: rising long run average costs
 scheduling complexity
 Loss of focus
 Inefficiencies

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4.4 Raw material and Supplies study
Materials and supplies are the major inputs
(ingredients) of projects though the degree of
consumption may differ from project to project.
closer relationship between the definition of input
requirements and other aspects of the project
formulation:
 definition of plant capacity
 location & site analysis

 selection of technology and equipment

 Economic viability

 Etc

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4.4 Raw material and Supplies study
The objective is
to identify and quantify the project material inputs
to assess the feasibility of a sustained supply of these
inputs
Basic issues to be raised:
 What types of materials are needed?
 Where are the sources of these materials?
 How are they obtained?
 What are the costs of these materials?
 What are environmental impacts of using these materials?
 etc

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 Classification of Raw Materials and Supplies
1. Unprocessed and semi-processed raw materials
Includes the following types of items:
i. Agricultural products: cereals, oil seeds, flowers, sugar canes
and sugar beets, etc
ii. Livestock and forest products: meat, milk, fur, leather/skin,
horn, teeth, etc of animals (both domestic and wild), timber,
gums, etc.
iii. Marine products: fishes, the water itself, plants in the water ,
salt, etc.
iv. Mineral products: both metallic (gold, phosphate, iron, etc) &
nonmetallic (oil, gas, coal, clay, etc)

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Classification of Raw Materials and Supplies
2. Processed industrial materials and components
Such inputs can be generally classified under:
i. Base metals: copper, aluminum, etc
ii. Semi processed materials: sheets, tubes, round bars, etc
iii. Manufactured parts, components and sub-assemblies: electronic
equipments, seal frame, engine, etc

3. Auxiliary materials & factory supplies

Do not become integral part of finished product
 Chemical additives, packaging materials, containers, crates,
paints, varnishes, oils, grease, cleaning materials, etc

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 Classification of Raw Materials and Supplies
4. Utilities
 Electricity, water, fuel, steam, etc
 A detailed assessment of the utilities required can only be made after
analysis and selection of location, technology and plant capacity.
5. Spare parts
 Numerous small items & major components and parts of machinery or
equipment.
6. Supplies for social and external needs
 not directly related to project operation
 E.g. for a project in a remote area:
 For employees & their families: food staffs, medicine, clothing, education materials

 For the local community: road & environmental cleaning materials

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Specification of Requirements
In specifying the type, quality and quantity materials
required, the following factors are considered:
Technical factors- such as technology and production
process, type of machinery and equipment, production
capacity and program etc
Commercial and financial factors- such as market
demand regarding products quality, competition for
materials etc
Socio-economic factors- such as skill of work force,
environmental policies and regulations, culture of the
people etc.
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 4.5 Locations, Site and Environmental
Assessment
Location and site are often used synonymously but must
be distinguished.
Location refers to a fairly broad area like a city, an
industrial zone or a coastal area.
Site refers to a specific piece of land where the project
would be set up.
The selections of location & site may be made separately
or together.

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 Location Analysis
 Location choice is made from a wide geographic area within which
several alternative sites may have to be considered.
 Qualitative as well as quantitative considerations are to be taken
into account
Factors determining choice of location:
 Proximity to R.M. & market
 Infrastructures

 Government policies

 Environmental impact

 Labor situation

 Climatic conditions & ecological requirements

 General living condition

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Factors determining choice of location
1. Proximity to R.M. & Market
 The optimal location is the one with minimum
total costs of products sold

i) for resource-based projects: the one close to source of R.M

ii) for a project based on imported R.M: the one close to a
port
Iii) for projects producing perishable & bulky products:
the one close to the center of consumption

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Factors determining choice of location
2. Infrastructures:
Availability, cost, and reliability
 i)Technical Infrastructure: Water, electricity, insurance, banks, academic
institutions etc
 ii)Transport and Communication: Transport facilities such as by water, rail, air,
or road available for the inflow of various inputs and for the marketing of products
& good communication facilities including telex ,telephone, internet, etc

3. Government policies
 Identification of industrial zones
 Incentives to encourage investments
 Fiscal and legal regulations

01/14/21 Project A & E 80

Factors determining choice of location
4. Environmental impact
 Environmental impact assessment (EIA) is an assessment which aims at
ensuring that development projects are environmentally sound (friendly).
 To see the positive & negative impacts of the project
i) Negative impacts
 Throwing gaseous emissions
 Disposal of wastes to river
 Causing noise, heat, etc
 May need to acquire environmental protection devices
 Government may impose high taxes
o ii) Positive impacts: additional benefits to the society
o Subsidies or prizes may be given by government

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Factors determining choice of location
5. labor situation
 The availability of skilled, semiskilled and unskilled labor
 Labor rates (past trends, current, and projected)

 Labor strikes (frequency and severity)

 Labor productivity

6. Climatic conditions and ecological requirements

i) Climatic Conditions: temperature, humidity, sun shine, rainfall, wind,
snow, dust, earthquake, etc
 There may be direct impact on the project costs of such factors as
dehumidification, air conditioning, refrigeration, or special drainage.
 Climatic conditions can also determine the success of a project in an

indirect way. E.g. Skilled labor force is reluctant to work in areas with
extreme climatic conditions.

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Factors determining choice of location
ii) ecological requirements
 Some projects may not have a negative environmental impact
themselves. But they may be sensitive to such effects.
 An agro industrial project clearly depends on the use of raw
materials that have not been degraded by contaminated water and
soil.
 Management and labor may be reluctant to work in a factory located
in a polluted area with health risks.
7. General living conditions
 Cost of living
 Housing
 Facilities (education, recreation, transport, and Medicare, etc)

01/14/21 Project A & E 83

Evaluating Location alternatives
Factor rating
L0cation CVP analysis: determine the location that
will have lowest total costs (or highest profits)
Center of gravity method: locating a distribution
center that minimizes distribution costs or travel time
to various destinations

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Factor Rating
General approach to evaluating locations that includes
both qualitative and quantitative inputs
Procedure:
1. Develop a list of relevant factors called critical success factors
2. Assign weights to each factor
3. Decide on common scale for all factors (0 to 100)
4. Score each location
5. Compute weighted score (wt x score) for each location
6. Sum up the weighted scores and get composite score
7. Select the location with highest composite score

01/14/21 Project A & E 85

Factor Rating
BIKU Supermarket is planning to open shopping center
outside Addis Ababa. It is considering two locations:
Hawassa and Nazareth towns.
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight Nazareth Hawassa Nazareth Hawassa
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
Tourists visiting .05 60 90 (.05)(60) = 3.0 (.05)(90) = 3.6
Land acquisition &
Construction costs .10 7080(.10)(70) = 7.0 (.10)(80) = 8.0
Proximity to inputs .28 80 70 (.28)(80) = 22.4 (.28)(70) = 19.6
Community growth
potential .32 75 70 (.32)(75) = 24.0 (.32)(70) = 22.4
Totals 1.00 73.9 68.6

01/14/21 Project A & E 86

 Choice of Site
Once the location or alternative locations are decided
upon, a specific project site or alternative sites should
be defined
Qualitative as well as quantitative considerations are
to be taken into account like that of location
selection.

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Factors determining choice of site
1. Ecological conditions of sites
 soil type, site hazards, history of natural calamities etc

2. Environmental impacts
 the nature of the project in relation to restrictions, standards and
guide lines of the government concerning noise, air pollution, effects
if it is close to residential areas etc.
3. Socio–economic conditions
 restrictions, incentives, requirements

4. Costs of land
 cost of land differs from site to site depending on of course its
proximity to main streets and other transport facilities, major
markets, customers etc

01/14/21 Project A & E 88

Factors determining choice of site
5.Infrastructure
6. Site preparation and development costs
 some areas are more appropriate for construction without
much preparations and development efforts while other areas
may need several works to make them ready for use
7. Strategy of the projects such as future expansion
8.Cost of utility lines extension

01/14/21 Project A & E 89

Factors determining choice of site
9. Number of sides of a land parcel
A multi-sided parcel is more suitable for retail
 One-side parcel is more suitable for residential

10. Nature of goods (products) produced (perishables or

not)

11. Distance to seaport (import and export)

01/14/21 Project A & E 90

4.6. Technology and Engineering
4.6.1 Technology Analysis
Technology = Technical process + Know-how
Technical process = Hardware + software
Know-how = Knowledge of how to use them
Two or more technologies may be available
 Define technology required for a particular project through the evaluation of all

alternatives and selecting the most appropriate .

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Factors Determining Choice of Technology
1. Plant capacity
 To meet a given capacity requirement, only a certain production
technology may be available.
2. Principal inputs
3. Investment outlay and production cost
 Over period of time & per unit of production

4. Product mix
 That results in a wider product mix including saleable byproducts is
preferable
5. Latest developments
 Must be based on latest developments to minimize the likelihood of
obsolescence in the near future

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Factors Determining Choice of Technology
6. Use by other units
 must be fully proven and utilized in the manufacturing by others

7. Ease of absorption
8. Labor condition
 In countries with a shortage of & expensive labor - capital intensive
 In countries with excessive & cheap labor - labor intensive

9. The Environmental impact

 Investments in environmental protection devices

10. Implication in terms of foreign participation

Foreign: labor, raw materials, aid, etc

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Means of Technology acquisition
1. Technology licensing
Gives the licensee the right to use patented technology
and get related know – how on a mutually agreed basis.
Efforts should be made to acquire only the essential
components of the technology package offered by the
licenser
May be appropriate when
There is continuous technology improvement
The firm uses only some elements of the technology
package

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Means of Technology acquisition

2. Purchase of Technology
 Obtain the full ownership of technology through outright purchase
 May be appropriate when
 There is no possibility of significant improvement in technology in the
foreseeable future
 There is hardly any need for technological support from the seller of
technology
3. Joint Venture Arrangement
 The supplier of technology may participate technically as well as
financially
 May be appropriate when
 Continuing technical assistance & supply of inputs from technology

supplier are necessary

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4.6.2. Machinery & equipment Selection
The selection of equipment and technology are
interdependent
Technology choice & equipment selection may be made
together or independently
Types of equipments are:
 Plant or process equipment
 Mechanical equipments

 Electrical equipments

 Instruments

 Control devices

 Internal transportation equipments

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Factors in selection of equipments
Plant capacity
Production technology
Infrastructural constraints
The length of time required for training
Investment outlay required
The availability of foreign exchange for imported equipments
 Maintenance requirements and the availability of maintenance
facilities
Government polices such as import controls
The degree of automation required
The availability of spare parts

01/14/21 Project A & E 97

 Factors in selection of suppliers
of equipments
The desired quality of machinery
The level of technological sophistication
The reputation of the suppliers
The expected delivery schedules
The preferred payment term
The required performance guarantee.

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4.6.3. Structure and Civil Works
may be divided into three categories:
1. Site preparation and development
 Grading & leveling of site
 Removal of existing structures

 Relocation of existing pipelines, cables, roads, power lines

 Draining & removal of standing water

 Extension of utility lines

2. buildings and structures

 Factory buildings
 Ancillary buildings (stores, laboratories, maintenance centers)
 Administrative buildings
 Staff welfare buildings (cafeteria, medical centers)
 Residential buildings

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4.6.3. Structure and Civil Works
3. out door works
 Supply & distribution of utilities
 Handling & treatment of wastes & emissions

 Transport & traffic arrangements

 Out door lighting

 Landscaping

 Enclosure & supervision (fencing, gates, doors, etc)

The plans and estimates for civil engineering works should be

detailed for costs estimates and implementation scheduling.

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4.7. Human Resource and Organization
4.7.1 Plant Organization and Management
 Organization is the means by which the operational functions and
activities of the enterprise are structured and assigned to
organizational units, represented by managerial staff, supervisors and
work force, with the objective of coordinating and controlling the
performance of the enterprise and the achievement of its business
targets.
 Indicates the delegation of responsibilities
 Depends to large extent on the
 Size & type of the enterprise
 Strategies, policies & values of those in a position of power in the
organization

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Organizational Functions

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Organizational Structure
 Reveals vertical operational responsibilities & horizontal linkages &
represented by organizational chart.
 The structure of an organization will determine the modes in which it
operates and performs.
 The most common version is the pyramid shape, with three
organizational level
 Top management
 Middle management
 Supervisory management

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Organizational Design
Organization Design is a formal, guided process for integrating
the people, information and technology of an organization.
The design of the organization usually include the following
steps:
 The goals and objective for the business are stated
 The functions that are necessary to achieve the goals are

defined
 The necessary functions are grouped or related

 The organizational framework or structure is designed

 All key jobs are analyzed, designed and described

 A recruiting and training program is prepared

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4.7.2. Overhead Cost
 Overhead cost could be grouped as follows:
 Factory Overheads
 Wages and salaries of indirect factory workers
 Factory supplies
 Maintenance
 Administrative overheads
 Wages and salaries of administrative workers
 Office supplies & utilities
 Rents & insurance
 Marketing Overheads
 Indirect marketing costs (Wages and salaries of sales persons, advertising, training
etc.)
 Depreciation Costs
Financial Costs

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 4.7.3. Human Resources
Issues:
Define the human resource requirements at various
levels and during different stages of the project.
Determine the availability and costs of HR
Analyze the training needs & costs related to training
Prepare recruitment plan & training program

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4.7.3. Human Resources
The determination of human resources required is an
important part of a feasibility study
People determine the success and failure of
organizations and projects
 Bad management or inadequate skills and experience of
personnel in key positions can easily jeopardize a promising and
carefully planned project.
 A project with great risk and uncertainties may on the other

hand prove to be successful due to good management and

qualified labour.

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Socio – economic and Cultural Environment

01/14/21 Project A & E 108

Recruitment Plan
Factors to be considered in preparing recruitment plan:
 The general availability of relevant human resource categories in
the project region and country
 The supply and demand situation in the project region (Human

Resource)
 Recruitment policy and methods

 Training policy and program

 probable terms of employment, including the wages and salaries

offered
 possible fringe benefits to employees and their families

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Training Plan
Lack of experienced and skilled personnel can constitute a
significant bottleneck for project implementation and operation
in developing countries.
 Extensive training program should be designed and carried out as part of
implementation process of investment projects.
Training may be planned
 at the plant site
 at the plant of joint venture partners or suppliers of technologies and equipment
 in similar factories in the country or abroad
 at specialized training institutes.
 Training can be provided at the factory by
 managerial and technical personnel
 specially recruited experts
 expatriate personnel

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Cost Estimates

01/14/21 Project A & E 111