KOE083: ENTREPRENEURSHIP DEVELOPMENT

UNIT 2-

Project identification- assessment of viability, formulation, evaluation,

financing, field-study and collection of information, preparation of

project report, demand analysis, material balance and output methods,

benefit cost analysis, discounted cash flow, internal rate of return and

net present value methods.

1. Project Identification

Project identification is the initial step in project planning, where a viable business opportunity
is recognized based on market demand, resource availability, and economic conditions. It
ensures that the business idea is practical and profitable before investing time and money.

Key Factors in Project Identification:

1. Market Demand Analysis – Understanding customer needs and industry trends.

2. Resource Availability – Evaluating raw materials, labor, and technology.

3. Government Policies – Checking for subsidies, tax benefits, and regulations.

4. Financial Feasibility – Estimating the required investment and expected returns.

5. Technical Feasibility – Assessing whether production technology is accessible.

2. Assessment of Project Viability

A project must be evaluated for its feasibility and sustainability before starting. This involves
various assessments:

A. Market Viability

 Identifying target customers and their purchasing behavior.

 Analyzing market trends and forecasting future demand.

 Studying competition and pricing strategies.

 Determining the availability of machinery, skilled labor, and raw materials.

 Assessing the efficiency and cost-effectiveness of production techniques.

 Checking for patents, trademarks, or special licenses needed.

C. Financial Viability

 Estimating total investment, operating costs, and expected profits.

 Checking for availability of funds from banks, investors, or government grants.

 Analyzing cash flow to ensure sufficient working capital.

D. Operational Viability

 Assessing whether supply chains and logistics are efficient.

 Checking if infrastructure (roads, power, water) is available.

 Ensuring compliance with government labor and environmental laws.

3. Project Formulation

Project formulation involves structuring and defining the project in a systematic way.

Steps in Project Formulation:

1. Define Project Objectives – Specify goals and expected outcomes.

2. Identify Inputs and Outputs – Determine required resources and expected

3. Prepare Financial Estimates – Calculate costs and revenue forecasts.

4. Conduct Risk Analysis – Identify risks and prepare mitigation strategies.

4. Project Evaluation

Project evaluation assesses whether a project is feasible and beneficial. It involves analyzing
various aspects:
Methods of Project Evaluation:

1. Economic Analysis – Evaluates the project’s impact on the national economy.

2. Technical Analysis – Assesses the ability to execute the project with available
resources.

3. Financial Analysis – Determines profitability, return on investment, and cash flow.

4. Social and Environmental Impact Analysis – Studies effects on society and nature.

5. Project Financing

Project financing refers to arranging funds to implement the project.

Sources of Project Financing:

1. Equity Financing – Raising capital by selling ownership shares.

2. Debt Financing – Taking loans from banks, financial institutions, or issuing bonds.

3. Government Grants and Subsidies – Getting financial assistance from the

4. Venture Capital & Private Investors – Funding from external investors or firms.

6. Field Study and Collection of Information

A field study is conducted to gather real-world data regarding the project.

Methods of Data Collection:

 Primary Data – Surveys, interviews, focus groups.

 Secondary Data – Industry reports, government statistics, competitor analysis.

Field Study Objectives:

 To assess customer preferences and purchasing patterns.

 To evaluate the availability of raw materials and suppliers.

 To identify risks related to market competition and industry challenges.

A project report is a detailed document covering all aspects of the project.

Contents of a Project Report:

1. Executive Summary – Brief overview of the project.

2. Project Description – Industry background, objectives, and scope.

3. Market Analysis – Demand, competition, pricing strategies.

4. Technical Feasibility – Machinery, infrastructure, production process.

5. Financial Plan – Investment needs, revenue projections, profitability.

6. Risk Analysis – Identifying risks and possible solutions.

7. Legal and Regulatory Framework – Business registration, environmental compliance.

8. Demand Analysis

Demand analysis assesses customer needs and market size before launching a project.

Factors in Demand Analysis:

1. Consumer Preferences – Understanding customer needs and trends.

2. Market Trends – Analyzing growth potential and seasonal demand variations.

3. Competitor Analysis – Evaluating competitors’ strengths and weaknesses.

4. Price Sensitivity – Determining how pricing affects demand.

9. Material Balance and Output Methods

Material balance and output methods measure input-output relationships in production.

Material Balance:

Ensures total input equals total output, considering raw materials, labor, capital, and waste.

 Helps optimize resource utilization.

 Reduces waste and production losses.

 Improves cost efficiency.

1. Physical Units Method – Measures the number of finished products.

2. Sales Revenue Method – Calculates revenue generated from sales.

3. Value-Added Method – Assesses the contribution to national GDP.

10. Benefit-Cost Analysis (BCA)

BCA compares project benefits to costs to determine feasibility.

Formula:

BCR=Total BenefitsTotal CostsBCR = \frac{\text{Total Benefits}}{\text{Total Costs}}

 If BCR > 1, the project is financially viable.

 If BCR < 1, the project is not feasible.

Key Steps in BCA:

1. Identify and list all costs and benefits.

2. Assign monetary values to costs and benefits.

3. Compare total costs with total benefits.

4. Make a decision based on the Benefit-Cost Ratio (BCR).

11. Discounted Cash Flow (DCF) Method

DCF is used to calculate the present value of future cash flows to evaluate project
profitability.

Formula:

DCF=∑Ct(1+r)tDCF = \sum \frac{C_t}{(1+r)^t}

Where:

 CtC_t = Cash flow at time t

 rr = Discount rate

 tt = Number of years
A higher DCF value indicates a better investment opportunity.

12. Internal Rate of Return (IRR)

IRR is the discount rate at which the Net Present Value (NPV) becomes zero. It measures
expected profitability.

Formula:

∑Ct(1+IRR)t−C0=0\sum \frac{C_t}{(1+IRR)^t} - C_0 = 0

Where:

 CtC_t = Cash inflows

 C0C_0 = Initial investment

 IRRIRR = Internal Rate of Return

Decision Rule:

 If IRR > Cost of Capital, the project is profitable.

13. Net Present Value (NPV) Method

NPV calculates the difference between present value of cash inflows and outflows to
determine project profitability.

Formula:

NPV=∑Ct(1+r)t−C0NPV = \sum \frac{C_t}{(1+r)^t} - C_0

Where:

 CtC_t = Cash inflows

 C0C_0 = Initial investment

 rr = Discount rate

Decision Rule:

 If NPV > 0, the project is profitable.

 If NPV < 0, the project should be rejected.