Unit-2

Project identification is the first phase of project life cycle.

2. It is a recurrent process of documentation, ranking and approving and analysis of

economic data for the purpose of seeking possible options for investment.

3. A risk is also involved in it. If the element of risk is high, there arises a need to define the
scope and nature of the project idea and to develop alternative solutions.

A. Process of Project Identification:

1. The process of project identification involves defining the purpose and scope of the
project, the justification for undertaking it and the solution to be implemented.

2. It also involves recruiting the project team and carrying out a phase review, before
proceeding to the next stage.

3. A business case is developed, describing the business problem to be addressed by the

project, the alternative solutions and the potential costs and benefits associated with each.

4. The business case is foundation for the project as it fully describes the project, the
reasons for creating it and the key benefits to be produced.

5. A feasibility study is then completed to ascertain the likelihood of the alternative

solutions actually delivering the stated benefits in the business

case.

6. This is used to identify the preferred solution, which must be approved before
proceeding.

7. The terms of reference describe what the project intends to achieve and the boundaries
within which achievement takes place.

8. This includes the project vision, objectives, scope, deliverables, project organization and
an implementation plan.

9. Once the project is defined, it is time to appoint the project team.

10. The project manager is recruited to take on responsibility for the project and recruit the
remaining members of the team.

Field study in Project identification

1. Field study is one of the part of project identification to make the reliability of business
idea, a field survey is an essential work to be done.
2. To know the response of the proposed idea, a sample from the target group may be
selected.

3. A manager may not be expert in the matter of field study so he may consult with the
expert or may hire any professional expert or agency.

4. Field study requires a lot of energy, time and money.

5. Field study of a product involves meeting with customers and to know their response
about the product. Do they like the product? Are they using any other product like product
or do they need any changes in the product? How is the service they are getting?

6. All these responses are analysed and a response sheet may be prepared.

7. There is the need of collection of information from the buyers, users and other persons
associated with the product.

8. Collection of information should be the continuous process as the needs and expectations
are highly flexible due to passage of time.

Assessment of Viability

1. The viability of the project ensures that the project under study should be viable in all
respects and terms.

2. It should be valuable for market in technical terms and even in economic and commercial
terms.

3. The assessment of viability of any project involves the market analysis, financial analysis,
technical issues and risks, and safety issues (environmental viability).

4. A product will be viable in the market if:

a It reaches to maximum number of customers.

b. It ensures a good return and stays in the market for a long time.

C. It ensures the future growth.

5. To ensure market viability, one should concentrate on consumer, their behaviour,

locations and their characteristics.

6. The technical viability ensures the feasibility of the product technically.

7. This indicates the product specifications, its features, uses, benefits and its ingredients.

8. This also includes the proper working of machines, tools and other equipment.
9. The financial viability takes into account the financial issues such as how much funds are
required for the complete project, what are the financial companies available to help, and
what will be the rate of return?

10. Social and environmental viability ensures the relationship of the society and the
project.

11. How this project is going to affect the society? What will be the impact of the product on
people and their health ? Is the project socially fit or harmful? Is it going to cause any
environmental hazard?

Methods of collection of information

1.Before starting any enterprise, it is essential to collect a large amount of information

relating to various aspects of the project.

2. All the information cannot be collected by the entrepreneur himself so he should have a
team of efficient workers so that when he is absent, work will not suffer.

3. The correct decision about the project depends on how much of the relevant information
we have about it.

4. There are various sources of collecting data as follows:

a. Primary Source of Data:

i An entrepreneur can collect the information telephonically or by questionnaire method.

ii. He may also have a one-to-one interaction with the people.

iii The accuracy of the data depends on the decision maker (an entrepreneur) that how
efficient and expert he is.

b. Secondary Source of Data:

i These sources are magazines, government records, researches and some agencies,

ii. This type of data will be more useful when target area is large and one-to-one
correspondence is not possible.

iii. Sample survey is also one of the sources of collecting information. It will consume less
time, less effort and less cost.

iv. If the sample size is quito large, we can get relevant information
1. The project report is a document, which gives an account of the project proposal to
ascertain the prospects of the proposed activities,

2. A good project report should contain the following information:

a. Land and building required.

b. Manufacturing capacity per annum.

c. Manufacturing process.

d. Machinery and equipments including their specifications and pricing.

e. Requirements of raw material.

f. Power and water required.

g. Manpower requirements,

h. Marketing.

3. A project report is prepared with the help of prescribed guidelines available with various
financial institutions like MSMEDIS, DIC's etc.

4. Information about prices of machinery and equipments, raw material and other inputs for
setting up an enterprise needs to be collected from the market.

5. A project report is the picture of a project.

6. The entrepreneur has to submit the copy of the project report to government agencies
and banks for provisional registration and approval for license, loans etc.

Difference between Project Report and Feasibility

Report

Project Report Feasibility Report

It mainly focuses on
It mainly focuses on determining determining feasibility of project i.e.
whether project is viable or not. possible to do easily and
conveniently or not.

It does not have a specific format. It have a specific format.

 Project Report Feasibility Report

Factors affecting project report

Factors affecting feasibility report
include time complexity, improper
includes scope of project, volume vs
communication, lack of
quality, complexity and scale,
understanding, cost related issues,
constraints such as funding, etc.
etc.

Its benefits include identifying risks,

cost management, control of project, Its benefits include improve team
increase project success manage focus, identify new opportunities,
budget effectively, improve provide important information
communication, increase team regarding feasibility, etc.
performance, etc.

Its main objective is to provide status

Its main objectives is to help
of scope, time, and budget of
decision makers to choose among
project and manage expectations of
options that are available.
stakeholders

It includes manufacturing process, It include information such executive

project description, marketing plan, summary, marketing strategy,
capture structure and operating cost, organizational structure, description
etc. of project, etc.

It is generally submitted to company

It is generally submitted to bankers. that requested to solve a particular
problem.

It is more difficult to understand and It is less difficult to understand and

handle than feasibility report. handle than project report.

Net Present Value (NPV):

1. NPV may be described as the summation of the present values of cash proceeds in each
year minus the summation of present values of the net cash outflows in each year.

2. NPV may be defined as the excess of present value of project cash inflows over that of
outflows.
3. Present value may be calculated as:
5. The market price of the shares will be affected by the relative force of what the investors
expect or what actual return is earned.

6. The discount rate (r) that is used to convert benefits into present values is the minimum
rate when the NPV is zero, the return on investment just equals the expected rate by the
investors.

7. If NPV > 0, the return would be higher than expected by the investors.

b. Internal Rate of Return (IRR):

1. This method is also known as marginal efficiency of capital like the NPV method, this
method also considers the time value of money by discounting the cash streams.

2. In NPV method, the discount rate is the required rate of return and cost of capital and its
determinants are external to the proposal under study, while in IRR these are based on
internal to the proposal.
3. Thus, while arriving at the required rate of return the cash flows (inflows and outflows)
are not considered, but the IRR depends entirely on the initial outlay and the cash proceeds
of the project.

4. That is why it is referred as internal rate of return.

5. It is defined as the discount rate (r) which equates the aggregate present value of the net
cash inflows with the aggregate present value of cash outflows of a project.

6. In other words, it is that rate which gives the project NPV of zero.

7. Mathematically, the IRR is represented by the rate (r) such that

Demand Analysis

1. To start a new business, we should know about the demand of the product.

2. If demand is known, an entrepreneur can plan other activities and can run the business in
smooth way

3. Analysis of demand can be done in an efficient way only when we have relevant
information about the future demand of the product.

4. Through forecasting we can understand the future demand.

5. Forecasting is a present activity and on the basis of this activity we can shape the future.
6. For demand analysis, we should firstly identify the factors affecting demand.

7. Some of the factors are marketing, price, sale, change in technology and standard of living
of the consumers

8. Demand analysis is also related to the number of competitors already available in the
market.

9. The potential customers are also identified and to keep an eye on the strengths and
weaknesses of each market player.

10. The main objective of demand analysis is to find out the answer that is it advisable to
start the production of such a product or not? Will it give the adequate rate of return on
investment?

11. Thus demand analysis is to be done keeping all the financial issues in mind.

A. Methods of Demand Analysis:

1. Various methods of demand analysis are

a. Material balance and output methods, and

b. Pay back period method.

2. Demand analysis is the research in the need of consumers for a specific product.

3. This is used to make out who wants to purchase a given product, how much they are
liable to pay for it and how many units they may buy.

A. Need of studying Cost Benefit Analysis:

1. Cost benefit analysis has been applied to big public sector projects such as dams, bridges
and new power projects.

2. Principles of cost benefit analysis can be applied to public sector for example, public
health programmes.

3. Principles of cost benefit analysis are being used to evaluate the returns from investment
in environmental projects, i.e., wind farms and the development of other sources of
renewable energy.

4. As we all know that financial resources are scarce, costs benefit analysis allows different
projects to be ranked according to those that provide the highest expected net gains in
social welfare.
 Benefit – disbenefits – operation cost
Benefit-cost ratio =
Total cost of project – salvage value

Discount Cash Flow

1. The discounted cash flow analysis represents the net present value of projected cash flow
available to all providers of capital, not of the cash needed to be invested for generating the
projected growth.

2. The concept of discounted cash flow is based on the principle that the value of a business
or asset is inherently based on its ability to generate cash flows for the providers of capital.

3. The discounted cash flow relies more on the fundamental expectations of business than
on public market factors.

A. Components of a Discounted Cash Flow:

Free Cash Flow:

It is the cash flow available to all providers of capital and is not affected by the capital
structure of the business. It is the cash generated by the assets of the business.

b. Terminal Value:

i Terminal value is the value at the end of the free cash flow projection period.

C Discount Rate:

i. The discount rate is the rate used to discount projected free cash flow and terminal value
to their present values.