Project Management

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 Project Management:
A project is a means of moving from a problem to a
solution via a series of planned activities.
It has been defined variously by different authors
and institutions.
 It is very often a non-routine, non-repetitive
undertaking normally with discrete time and technical
performance goals.

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 A project can be considered to be a series of
activities and tasks that:-------
* Constitute a specific objective to be
completed within certain specifications;
* Involve defined start and end dates;
* Have funding limits and ;
* Consume resources (money, time and
equipments).

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 A project has been defined by the project
management institute, USA as

“any undertaking with a definite objective

by which completion is identified’.

In practice, most projects depends on finite

or limited resources by which the
objectives are to be accomplished.”

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 The directory of management defines project as –
“an investment project carried out according to a plan in order to
achieve a definite objective within a certain time and which will cease
when the objective is achieved.”

 On the basis of various definitions, a

project can be defined as a
scheduled set of activities aimed at
the creation of a particular asset as
per planned specifications, with a
view to generate wealth as estimated
for future years.
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 Characteristics of a Project:
 A project is undertaken by an owner who may be in
private sector (individual, partnership or a
company)/public sector ( government, joint).
 A project is a set objective to achieve.
 An assigned team plans, manages and controls it.
 An outcome in response to environment.
 An undertaking involving future activities.
 Its implementation involves a coordination of works.
 Constitutes activities to be carried out in the future.
 Involves high skilled forecasting with sound basis for such
forecasting
 Has a start and an end.

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 Project Objectives
Project objectives are aimed at completing the project on time, within
the contemplated cost and at a profit to the company. Project may be
undertaken with
(i) Social
(ii) Economic
(iii) emergency objectives.

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  Social objective: The social project objectives are in
conformity with social cost benefit aspects of individual projects.
Social objectives is the process of evaluating a project from the
point of view of the total impact which the project will have on
the economy of the nation.
 Economic objective: The economic objectives of the
project are always profit oriented. It is primarily concerned with
primary financial costs and benefits of the project. It quantifies
the resources which the project will consume in the shape of
capital and maintenance expenditure.
 Emergency objective: Projects are also undertaken
on account of emergency and need of national importance; e.g.
defense and security. Such projects can be highly complex and
costly. They are non-industrial and usually funded by the
government .

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 Classification of Project:
 Quantifiable and Non- quantifiable projects:
 Quantifiable projects are those in which quantitative
assessment of benefits can be made.The projects for
industrial development, power generation etc. come under
this category.
 Non-quantifiable projects are those in which the benefits
can not be measured quantitatively. The projects involving
health, education, defense etc. fall under this category.
 Projects of different sectors:
 Projects can be classified according to the sector to which
the project owner belongs. They are projects: (i) for the
public sector (ii) for the private sector
(iii) in the joint sector.

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  Industrial and non industrial projects:
 Industrial and non industrial projects are those projects belonging to
organizations with commercial objectives. They always aim at making
profits. Whereas non-industrial projects are those projects undertaken
without monetary mission and primarily with social objective such as
healthcare, public education and irrigation.
 Projects belonging to core sector:
 There are complex mega projects undertaken by the government
which, in turn, help generate commercial activities. Many industrial
projects, namely, power projects, port facilities, highways, mining and
steel include in this.
 Need-based projects:
 Some projects grow out of needs or opportunities. Accordingly, there
are different types of needs leading to different types of projects such
as balancing, modernization, replacement, expansion, diversification,
rehabilitation and reconstruction projects.

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 Project life cycle:
The project has to pass through three different
stages such as –
(i) Pre-investment phase
(ii) Construction Phase
(iii) Normalization Phase.

 Pre-investment phase:
 It is primarily concerned with setting of aims and objectives,
forecasting of demand, selection of optimal strategy, evaluation of
input characteristics, projections of the financial profile, cost –
benefit analysis and ultimately pre-investment appraisal.
 This is the stage at which the project idea is converted into a
concrete investment proposal. At this phase, no much resources
are consumed. Some amount of expenditure has to be incurred in
the form of conducting surveys, consultancy and other intangible
expenses including registration fees, cost of license etc.

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 Construction Phase:
 Once the investment decision has been taken, the next phase is
the construction phase.
 Investments are made in building the basic assets of the project
during this phase. T
 he assets may be in the form of land and buildings, plant and
machinery, ancillary accommodation, communication services,
control systems and marketing organizations. Thus, this phase
consists mainly of developing the infrastructure for the project.
 Normalization phase:
 This phase begins after the trial run of the project framework
developed during the construction phase.
 Its primary objective is to produce the goods and services for
which the project was established.
 At this stage, the expenditure has to be incurred on raw materials,
fuel, utilities, administration etc. These expenses are of recurring
nature. During this phase, the assets created during the
construction period are utilized.
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 Project Management
 Project Management is the application of
knowledge, skills, tools and techniques of the
project activities to meet the project
requirements. It involves the following steps:
 Project Identification
 Project formulation
 Preparation of project report
 Project appraisal
 Project implementation

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 Project Identification
 It refers to the finding out of a business or environment opportunity.
 It involves collection, compilation and analysis of economic data for the
purpose of locating the possible opportunities for investment.
 It has already been noted that a project is conceived out of problems
and/or opportunities.
 It is of great importance that the under consideration by an organization
must fit in the overall environment.
 It is necessary that the owner of the project should critically overview
the parameters within which the project is to be implemented. These
parameters include: -

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  Industrial policy framework.
 The owner has to examine the government policy which encourages
industry as a whole. In this connection, he should examine the industrial
policy of 1991 regarding industrial license, foreign investments, foreign
technology agreements, and public sector policy.
 Major enactments relevant to industry:
 There are several major enactments made by the government to achieve
the objectives of socio-economic goals and its industrial policy. They
include the factories Act, the MRTP, the Industrial Development and
Regulation Act and the Pollution Control Act.
 Incentives for industries:
 There are various incentives introduced by the government with the
objective of rapid industrial growth as well as decentralization. Such
incentives include encouragement of export-oriented units, allowing
indirect taxes paid on raw materials to be claimed back, encouraging
industries in backward areas to remove regional imbalance, permitting
incentives for small-scale units etc.
 Industrial climate:
 The promoter has to look around for the possible opportunities prevalent
in the overall industrial climate. The government’s policy with regard to
various restrictions and relieves plays an important role in the
development and growth of the industry. One of the most important
encouragements for industries is the relief offered from taxation- both
direct and indirect

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 Project Formulation:
 A project grows out of problems or opportunities Therefore, the need for a
project. In the complexities of business world, it is almost impossible for an
organization to start investing in a business before drawing a plan for the
proposed investment.
 Project formulation is a systematic expression of such a plan with detailed
estimates within certain parameters .Such estimates, in order to be more
realistic and reliable, are based on actual experiences, environments along
with the trends forecasted for the coming years. It involves a step by step
investigation and development of project idea.
 It is a process involving joint efforts of a team of experts. The project team
should consist of experts in major substantive fields of the project.
 Depending on the situation, any large project should comprise the following
team members:*One industrial economist*One market analyst*One or more
technologist (s)/ engineer(s) specialized in the appropriate industry*One
mechanical or industrial engineering*One civil engineer, if needed*One
management accounting expert.
 A well- formulated project will help obtain the required assistance from
financial institutions. It will also help get the necessary government
clearances.
 Once the project has been identified, necessary steps are taken to explore
and assess the viability of it. It involves a study in one or more or all the
following areas: Feasibility analysis, Technical analysis, Economical analysis,
Financial analysis, Social cost-benefit analysis.

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 Preparation of project report:

 Having gathered all details from feasibility studies, the next step is the
preparation of project report.
 A project or a feasibility report is a written account which provides all the
details about the unit proposed to be set up for the manufacture of a
product or rendering a service. It includes the technical, financial,
commercial and social viabilities of the proposed project.
 The project report enables the entrepreneur to know whether it would be
physically possible, financially viable, commercially profitable and socially
desirable to do the business. Banks and financial institutions also require
project report for providing financial assistance.
 Various development agencies also require detailed project report to help
setting up of the business. The project report contains information
regarding economic, technical, financial, managerial and production
aspects of the project.

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 Objectives of Preparing Project Report:
The preparation of a project report serves the following three objectives:
1. Facilitate planning of business by setting guidelines for future action.
2. Help procure finance from various financial institutions and banks
which ask for such detailed information before giving any assistance.
3. Provide a framework for the presentation of information regarding
business required by the government for granting licenses etc.

To achieve the above objectives, the following should be ensured:

1. The project report is with sufficient details to indicate the possible fate
of the project when implemented.
2. The project report meets the questions raised during the appraisal. For
Example, the various types of analysis-financial, economic, technical or
social etc.-should be taken care of in the project report

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Technology and design aspects.
The project report should deal with technology and design which have already been
tested, thus minimizing the technical risk. In order to minimize the technical
uncertainties, it would be advisable to include the findings or reports of the specialists.
Economic aspects:
The project report should emphasize the economic aspects of the project which
includes:
* the location of the plant and the benefit for such location including the available
infrastructure facilities;
* the volume of the project, the capacity installed; and
* the availability of the resources and the utilization of such resources in a
comparatively beneficial manner, e.g. the ‘internal rate of return ’projected as compared
to the possible rate of return on investment from the market without inherent risk..

Social and political aspects.

The public attitude towards a project is becoming increasingly important. The
displacement of people and the concerned attitude towards implementation of a project
can be very serious problems. Environmental pollution, ecological balance, and potential
employment are all important considerations in the preparation of project reports.
Politics is an important aspect in the implementation of a project. So, the project report
should recognize this risky game since its implementation is dominated by political
considerations.

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Financial aspects.
The prime importance of a project is the assurance of the timely availability of funds or
resources. The availability of funds is to be ensured throughout, i.e. during the
implementation period as well as when it is supposed to start generating income/benefit.
The following are the valid questions to be answered by the project report:
1. Whether the generation of income or benefit will be sufficient for the servicing of the
borrowed funds, i.e. payment of interest and repayment of principal, and also the expected
income from the owner’s capital invested in the project.
2. Whether such returns on investment are adequate and, also, in excess of other possible
incomes from such funds without taking the risk.
The report also provides the ‘Break even point’ level of workings.

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Contents of a Detailed Project report:
A detailed project report should contain the following information:
1. Back ground or general information. The project should contain the following general
information about the project:
(a) Organization. It includes the type of organization, bio-data of promoters etc.
(b) Details about the product to be manufactured should be given
(c) Technical Know-how. The source of technical know-how along with the supply of major plant
and machinery, training of personnel etc. should be detailed
2. Project at a Glance .A summary of the product, capacity, production, sales. Project cost and
sources of finance are to be shown.
3. Report on the Market research on the product: Details of the market research on the product
should be given. It should contain :
(a) the expected volume of the market and its growth
(b) the expected volume of the marketshare
(c) the possible market channels
(d) the dealer’s expectation about the commission, discount etc.
(e) the credit period to be extended to the dealers
(f) the requirement of service after sales; and
(g) the competitors, their strength and weakness and their market share.
4. Technical details . These include details about the (i) Product (ii) Manufacturing process and
(iii)Plant layout.
5. Plant and Machinery: The plant and machinery required for the project should be detailed.

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6. Project Schedule: The project report should have complete details of the estimated time
schedule for the implementation of the project from the start till the final trail run, i.e. just
before the start of the commercial production.
The project schedule is a tool to ensure timely implementation of the project and an aid to
achieve the project objectives of time, cost and quality. The delay in any step may lead to
further delay of the subsequent steps.
Organization The organization structure should also be included in the project report. The
manpower requirements at different levels- managerial, skilled and unskilled- should be
shown. Pay scales for different grades should be ascertained.
Project Cost and Source of Finance The project report should include estimated
expenditure under the following various heads:
Land and site development
Building and supporting activities
Plant and Machinery
Know-how fees
Preliminary and pre operative expenses
Contingencies
Interest and commitment charges
Margin Money
Cost of Production: The detailed project report deals with the financial estimates of the
project operation for five to eight years from the start of the commercial production
Working capital requirements : The detailed calculation of the working capital required by
the project to carry out its operations should be shown in a project report.
Debt Service Coverage Ratio: The project report also shows the capability of the project t
serve the borrowings for its implementation. The project owners and the financial institution
lending the fund towards the implementation of the project may like to appraise and find
out whether the project can generate sufficient revenue to repay the loan together with the
interest due on such loan.
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 Project Appraisal:
 Project appraisal is the final stage in the preparation of a project. It is the
analysis of costs and benefits of a proposed project with the goal of
assuring a rational allocation of limited funds among alternative investment
opportunities in view of achieving specified goals. It is done both by the
management and the financial institution providing long-term loan for the
project. While deciding on financial support to a project, the financial
institution, in general, would like to appraise the feasibility of the project.
 Different Types of project Appraisal
The financial institutions, before giving financial support for the project,
take into consideration the following appraisals-

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  Technical appraisal:
 It is the study of the project to evaluate its technical aspects
including technology and design, production process, plant layout,
material inputs, capacity, and project schedule. The status of the
technical know-how and design envisaged in the project should be
fully assessed which should have the following attributes:
 The technology and design should be one already tested and
established.
 The know-how already within the country and currently in use should be
explored and compared with that envisaged in the project.
 The technology envisaged in the project should be the latest. Projects
without the latest technology lead to obsolescence. Latest technology,
though, is costly in the initial stages, will be economical in the long run.
 When a technology is acquired from a multinational company under a
collaboration, care should be taken to see that the technology is not
obsolete. In many cases, MNCs try to get rid of obsolete technology at
a higher cost.

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  Economical Appraisal:
 It is the study of the project to evaluate the economic
justification in investing the project. Such a study is not only
limited to a profitable financial return but also takes care to
ensure the following:
 Existence is an alternative better way to achieve the project
objectives.
 The project merit by the cost benefits analysis.
 The market survey report prepared either by the company or
the independent consultant should be examined to find out
the following:
 Details of the total market.
 The competition involved and the projected market share.
 The expected growth in the demand for the product.
 The basis of estimating the selling price of the product.

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Organizational Appraisal:

It represents proper evaluation of the organizational and managerial aspects of the project
to ensure the compatibility of the projected organization and management with its size
and complexity. A project which is considered technically feasible, economically
viable and financially sound may run into difficulties if it is not backed by sound and
efficient management. Hence, its importance.
A good project report should have the following attributes:
1. It must have a well knit project organization structure.
2. The organization should have an overall in-charge as project manager with the quality
of strong leadership, effective communicating ability and required theoretical and
technical skills.
3. The organization should be interlaced so that the project work is carried out in a unified
way.
4. The managerial personnel heading the different functions should be duly skilled in their
respective functions to carry out the project implementation and operation.
5. The organization should take care of the technical training required for the production
process.
6. the organization should institute a well-balanced standard personnel policy before
making large-scale recruitments. There should be a skilled personnel manager.

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  Commercial appraisal:
It involves study of the proposed arrangement for the purchase of raw
materials and sale of finished products.
The basic question to be asked in this respect is whether arrangements
have been made for uninterrupted supply of inputs needed in the
operation and to determine the market demand as well s marketing
channels for the supply of finished products.
Its main objective is to see that the proposed arrangements will ensure
that the best value is obtained for money spent.
 Financial appraisal:
The aim of carrying on a business is to earn more and more surplus
and grow. It is worthwhile to spend money only on that investment
which shows generation of money in reasonable excess of the total
investment in the project. The management has to take a decision as to
‘go’ or ‘not to go’ with the projected investment .To have a clear
understanding of the viability of the project, various financial analyses
of the project will have to be undertaken.
But, before going into such analyses, the following points are to
be kept in mind.

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 1. Estimates in the project report: Every project report contains estimates
regarding the probable expenses and revenue which may include:
 Monetary estimates regarding the cost of investment, projected expenses, and the
government subsidy.
 Fiscal matter based on various tax laws, their relevant applicability on the project
their effects on the profitability of the projected business
 Time estimates which include estimation of the period required in the procurement
of men, material, machines and money; the credit period to be offered to the
probable customers; and lead time required by the suppliers.
1. Risk factor in business: There is some element of risk in every business.
Higher the risk, greater will be profit. Therefore, the element of risk will have
to be estimated.

3. Unforeseen situation: A project may be a very professional one with high

quality estimates showing profitability. But things may be totally different due
to change in circumstances by unnatural or unforeseen events so that the
actual may deviate from the estimates. Natural calamities, change in
government policy due to change in political situation, pollution control,
Greenpeace Movement, ecological balance etc .are examples of such
unforeseen events. These may adversely affect the management’s analysis
of the project.

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  FINANCIAL TECHNIQUES FOR PROJECT APPRAISAL
 Before taking a decision on the proposed investment, a
thorough financial analysis is to be made on the basis of certain
well-established financial techniques with the projected figures.
There are many such financial techniques to evaluate the
projected returns against the projected investment. The
commonly suggested appraisal methods are:
 Payback period
 Discounted payback period
 Average rate of return
 Net present value
 Internal rate of return
 Profitability index

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PAYBACK PERIOD:
It denotes the length of time until the sum total of the estimated cash flows
generated from the project equals the investment cost. The shorter the length of
time, the better for the project owner. It is calculated by the following formula:
Payback period= Origin cost of investment
Annual cash inflows or savings
For example, a project requires an investment of Rs. 1,20,000 and has an
estimated life of 8 years promising cash savings of Rs. 40,000 (before
depreciation but after tax).
The payback period will be 3 years, i.e. 1,20,00/40,000 =3 years.This tells the
finance manger that if the net cash gains after taxes continue for at least 3
years, the firm will recoup its net investments.
When the cash gains generated by the project are unevenly distributed , one has to
take into account cumulative cash gains resulting from the project until the year
in which the running total is equal to the amount of investment outlay.
For example, the payback period can be worked out from the
figures given below:

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 Initial investment-Rs.81,000
Year Net cash inflow Accumulated net cash inflows
1 7,900 7,900
2 18,500 26,400
3 26,500 52,900
4 50,000 1,02,900
5 56,300 1,59,300

It is seen from the above table that the initial investment of Rs.81,000 is made after 3 years and
before the fourth year end. By interpolation, the recovery of Rs.81,000 is made as follows:
Rs.52,900 is net earning after 3years.the balance 28,100(i.e. 81,000-52,900) is earned on the
fourth year.
Rs.50,000 is earned in 12 months of the complete fourth year (i.e. 1,02,900-52,900=50,000)
Thus 28,000 is earned in 28,100 x 12 =7 months
50,000
Therefore, the payback period is 3 years + 7 months =3.7 years. If the management is
looking for a payback period of 4 years, this period of 3.7 years being less than 4 years,
a decision in favour of this investment can be taken by it.

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The following are the merits of payback period method of financial analysis:
 Simple to understand and easy to calculate.
 Emphasizes on the liquidity, i.e. cash.
 Very important for cash forecasting, budgeting and cash flow analysis.
 Can be used profitably for short-term capital projects which start yielding returns in the
initial years.
 Minimizes the possibility of losses through obsolescence.
The basic drawbacks of this method are:
 Requires estimation of a safe period which, in reality, varies from industry to industry;
e.g. in heavy industry the payback period will be very long.
 Ignores the time value of money; the cash inflows in future years are, in reality,
worthless today.
 Disregards the cash flow subsequent to the payback period.
 Unsuitable while comparing the payback periods of two or more projects where the net
cash inflows are of widely different amounts for different projects.
 In spite of these drawbacks, decisions on short term investment can be taken on the
basis of this method.

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 Discounted Payback Period: One of the drawbacks of payback period
method is that it ignores te time value of money. The discounted
payback period method is suggested to overcome this limitation. Under
this method, the future cash flows are discounted at certain rate to
arrive at their present value. The discounted payback period represents
the period by which the estimated future cash inflows discounted as on
date recover the investment costs. This method is same as the payback
period with the difference that the net cash inflows of future years are
discounted to the present value.
The discounting of the future cash is explained below.
Rs.100 @10% p.a. becomes 110 after 12 months, when discounted
@10%, is worth 100 today.
It is found out by:
P
100+r n
100

Where P= Amount of future inflow

r = rate of discount
n= Number of years relating to the inflow
In this example, the discounted value will be
110 =100
100+10 1
100
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Average Rate of Return :
This method is also known as Average Accounting return or Average return on
investment .
Under this method, the entire life of a project is taken into account.
It represents the rate of return which the average projected investment earns per annum.
The earnings means the annual average of the projected net earnings, i.e. income after
depreciation and taxes. It can be calculated as follows:
ARR= Average annual net earnings x 100
Average cost of investment
Average investment = Investment
Investment at the beginning + Investment at the end
2

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 Example:
Assume that a firm is considering an investment project and the cost of the
same is Rs.50,000, the economic life of the project is 5 years. The net profits
after tax from the project for 5 years are as follows:
Years Profit
1 3000
2 4000
3 3000
4 2000
5 1000
The salvage value after economic life is estimated at Rs.5000.
The ARR can be calculated as follows:
Average net income = 3,000+ 4,000+3,000+2,000+1,000 = 3,000 = 2,600
5 5

Average investment = 50,000 + 5,000 = 27,500

5
ARR = 2,600x100 =9.5 %
27,500

Decision rule:
•The project which has the highest return is given the first rank, the project with the
next highest rank is given the second rank, and so on.
•If the management’s expected rate of return is 8%, a decision can be taken in favour
of this project.
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 NET PRESENT VALUE METHOD:
 It represents the difference between the market value of investments
representing the presenting worth and its cost.
 This means that there is sufficient value addition by launching on the project.
Otherwise, the investor would like to keep the money as deposits with the bank
or rank-one business organization earning considerable interest without such
risk in such investment.
 The NPV method is a system of finding out the present value of future net cash
flows. The following steps are involved in its estimation:
 Find out the project cost incurred at the start of the project
 Find out the future cash flows as estimated for the projected business.
 Select an appropriate rate and a period to find out the present value of the future net
cash flows for the period by discounting the same by the selected rate.
 If any investment is made in later years, It should be discounted by the same rate.
Thus, the present value of the total investment is arrived at.
 Find out the difference between the present value of cash inflows and the investment
cost and this difference represents NPV.
Decision rule:
 In the case of mutually exclusive or alternative projects
( where only one is to be selected), accept a project
that has the highest NPV.
 In case of independent investment, accept a project if
its NPV is greater than or equal to zero.
 If NPV is negative, reject it.

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 Example:
A firm is considering an investment proposal costing Rs.20,000 today and will
produce a cash inflow of Rs.6,000 a year for the next 5 years. The firm’s
cost of capital is 12%. The NPV can be calculated as follows:
Present value of outlays = Rs. 20,000
Present value of inflows Rs.6,000 annuity for 5 years at 12%
From annuity table Rs.6000 x 3.605= 21,630
Present value of inflow Rs.21,630
Present value of outflows Rs.20,000
Net present value Rs. 1630
The investment proposal has an NPV of Rs. 1630. Since it is a positive NPV, it
indicates that the return on the project exceeds the cost of capital. The promises
a 12% return plus an additional return of Rs.1630, i.e. 21630-20,000.
Applying the decision rule, since the NPV is positive, the project can be accepted.

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 Internal Rate of Return:
 This method seeks to find the earnings rate at which the present value
of streams of cash gain equals the amount of the investment outlay.
 IRR is defined as that rate of return which would equate the present
value of capital expenditure to the present value of the net cash inflows.
 Thus, it is the rate of discount which would reduce the sum of the
present value of net cash inflow over the project life (including
construction period) to Zero.
 If this rate is greater than the cost of capital, it means that the funds
committed will earn more than their cost.
 When IRR equals the cost of capital, the firm in theory would be
indifferent to the proposal in question as it would not be expected to
change the firm’s value.
 Thus, the decision is in favour of the project when the IRR exceeds the
expected return from investment.

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 Profitability Index:
It represents the relationship between the present value of the future
earnings and the cost of investment. This index can be computed only if
the NPV method has been used. The rule is that the project with the
highest positive NPV should be selected. Obviously, if there is a
positive NPV, the index will be more than 1, and if the index will be
negative when the NPV is negative.
Being almost similar to NPV, if higher is the index, such a project is chosen
for investment. Profitability index (PI) is calculated as follows:
PI = Present Value of inflows
Present value of outflows (investment)

santosh parashar
 Project Implementation:
Another step in the lifespan of project management is the implementation of the
project.
 The level of activities mount up to peak during the stage of implementation and
taper down to zero on completion.
 A number of special techniques are employed by the project management when
the project implementation travels through its life cycle.
 For the successful implementation of a large project, the organization launching
the project should first develop a project management team.
 The team should comprise professionals such as engineers, and accountants
with responsibilities in the respective fields.
 The team should be headed by a project manager.
 The team should be able to complete the implementation of the project within
the projected schedule, and the projected cost and deliver the project with
definite quality.

santosh parashar