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PROJECT FEASIBILITY
CHAPTER
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
The feasibility study involves
Market analysis
Technical analysis
Environmental analysis
Financial analysis
Social cost benefit analysis.
FEASIBILITY STUDY
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Aim: To identify the need or the potentialdemand for the product or service resultingfrom the project.
Objectives for the study are spelt out inquestion form and can be grouped under thefour Ps of marketing.
Let us consider a firm that plans a project toset up a unit to manufacture domestic air-conditioners
Market Analysis
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Product. Who are the buyers of air-conditioners?
What is the current total demand?
How is the demand distributed (geographically as well as seasonally)?
What is the break up of the demand (by sizes and models)?
Price What price is the customer willing to pay?
What will be the cost of production?
Place
What should be the channels of distribution?
What should be the trade margins?
Promotion
How can customers be convinced of the superiority of the air-conditionerover those produced by competitors?
How should the customers be made aware of the attributes of the product?
Objectives of Market Study
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Issues to consider
Purpose
Person
Method
Time
Sample
Secondary Information
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Manufacturing process and technology
Material inputs and utilities
Product mix
Plant capacity, location and layout
Machines and equipments
Civil works and structuresProject charts, layouts and work schedules.
Technical Analysis
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
What will the technology do?
What will it not do?
What inputs will it require?
What will it cost?
How certain are the above?
Sources of Technology. Technology maybe developed in-house by the firm or may beacquired from outside the organisation eitherfrom abroad or indigenously.
Selection of Technology
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Long term relationship
Components
Uncertainty
Costs
Sources
Technology Acquisition - Issues
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Identification
Choice of technology is dictated by plant capacity,the principal inputs available, capital outlays,
product mix and the ease of absorptionComponent required
Licensing agreement, an outright purchase oftechnology or a joint venture with the supplier of
technology.
Technology Acquisition Process
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Evaluation Does it use local raw materials which are easily available?
Can it be used by the local inhabitants? Does it conform to theknowledge and skills available locally, or will it require that highly
skilled and trained man power be brought in from elsewhere tooperate the technology?
Will the products and services produced or facilitated by thetechnology meet the basic needs?
Is the technology ecologically friendly and will it maintain
environmental harmony? Is it in harmony with the local social and cultural norms?
Source
Negotiations
Technology Acquisition Process
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Definition
Technology Package
Payment
Duration
Access to improvements
Rights and obligations
Technology Transfer Agreement
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Indemnification
Exclusivity or non-exclusivity
Force Majeure
Arbitration
Governing law
Technology Transfer Agreement
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Dr. CH. VENKATAIAH
Associate Professor601-PROJECT MANAGEMENT
Financial analysis aims at studying thefinancial viability of a project.
It is concerned with the financial profitability
of the project.
This involves the estimation of the cost of theproject and an estimation of cash flows that
will result after the project is completed.Criteria used net present value, internal rate
of return, return on investment and benefit
cost ratio.
Financial Analysis
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Land and site development
Building and civil works
Plant and Machinery
Miscellaneous fixed assets Pre-operative expenses
Preliminary expenses
Capital Issue expenses
Provision for contingencies
Technical know-how fees
Margin money for working capital
Project Costs
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Equity
Preference Capital
Term loans
Debentures
Deferred credit
Miscellaneous sources
Means of Finance
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A. Revenue from sales and other income.
B. Operating expenses.
C. Gross profit A B.
D. Interest on term loans and short term borrowings
E. Depreciation and amortisation of preliminary expensesF. Profit before tax C D E
G. Tax
H. Profit after tax F G
I. Dividend on preference shares and equity sharesJ. Repayment of loans
K. Retained profit
L. Net cash accrual K + E
Profit Loss Statements
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Stream of cash flows is obtained from theprofit and loss statements. In the final year ofthe life of the project, salvage value of assets,
final settlement of all loans and workingcapital are also taken into account.
Profit Loss Statements
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Managements minimum desired rate of
return is used as a discounting rate
Net Present Value
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0
1
where(1 )
n
tt
t
F
NPV Ik
0 Initial investment (since it is an outflow, it is negative)
Net cash flow for periodRequired rate of return
t
I
F tk
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Discount rate at which NPV is zero.
Internal Rate of Return (IRR)
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0
1
0 where
(1 )
n
t
t
t
FI
k
0 Initial investment (since it is an outflow, it is negative)
Net cash flow for period
Internal rate of return
t
I
F t
k
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
Commonly used methods Average income after tax/Initial investment
Average income after tax/Average investment
Average income after tax but before interest/Initialinvestment
Average income after tax but before interest/Averageinvestment
Average income before interest and tax/Initial
investment Average income before interest and tax/Average
investment
Return on Investment
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Benefit cost ratio
Benefit Cost Ratio = Present value ofbenefits/Initial Investment
Pay back period - the time that would elapsebefore the initial investment is fully recovered.
Other Methods
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Environment. The environment of man consistsof everything that is outside him. According toThe Environment (Protection) Act, 1986,
environment includes water, air, land and theinter-relationship that exists between water, air,land and human beings, other living creatures,plants, micro-organisms and property. The
definition includes interaction between the non-life components and their interaction with livingbeings.
Environmental Analysis
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Environmental pollutant. The Act defines anenvironmental pollutant as any solid, liquid or
gaseous substance present in such
concentrations as may be, or tend to beinjurious to environment.
Environmental pollution. It is the presence in
the environment of an environmentalpollutant.
Definitions
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Dr. CH. VENKATAIAHAssociate Professor601-PROJECT MANAGEMENT
It is a tool used to identify the environmental,social and economic impacts of a projectprior to decision-making.
Aims to predict environmental impacts at an early stage
in project planning and design
find ways and means to reduce adverse impacts
shape projects to suit the local environment
present the predictions and options to decision-makers.
Environmental Impact Assessment
(EIA)
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Scoping Identifies key issues and concernsof interested parties. Helps in site selectionand in identifying possible alternatives
Screening
Identifying and evaluating alternatives
Mitigating measures
EIA Study - Steps
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A description of the project, its purpose, its location, itssize its design and technical details such as materials tobe used and so on.
Description of the significant effects of the project. This
should include the effect of the project on eachcomponent of the environment, describing the natureand severity of the impact. For Government projects, theeffect on plans for land usage and surrounding areas
should also be included. Private projects which wouldaffect land usage in surrounding areas are not permittedto be undertaken.
Environmental Impact Statement (EIS)
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Dr. CH. VENKATAIAHAssociate Professor
601-PROJECT MANAGEMENT
Possible alternatives should be spelt out in the EIS, bothin terms of alternate sites and alternate projects whichdo not cause adverse effects to the same degree asforeseen in the project under review.
The report should list details of the possible remedialand mitigating measures that will be adopted to prevent,avoid and reduce the adverse effects and the extent towhich these effects will be reduced.
The residual adverse effects of the project despite themitigating measures adopted.
Environmental Impact Statement (EIS)
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Dr. CH. VENKATAIAHAssociate Professor
601-PROJECT MANAGEMENT
Evaluation of the commercial and socialdesirability of the project vis--vis the adverseimpact on the environment caused by it.
Amount of resources that have to becommitted irretrievably to the project.
Environmental Impact Statement (EIS)
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601-PROJECT MANAGEMENT
Life cycle Assessment
Environmentally sound technologies
Cleaner production
Eco-design
Supply chain management
Environment Management System
Mitigating Measures
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