MAHATMA GANDHI UNIVERSITY – BBA (CBCS) PROGRAMME
SUBJECT CODE AND NAME – BA4CRT18, ENTREPRENEURSHIP
SEMESTER IV
MODULE 5
PROJECT REPORT AND PROJECT APPRAISAL
Definition of Project Report
A project report is a “written document of various activities to be undertaken by a firm
and their technical, financial, economic and social viabilities”. It gives a complete analysis
of the inputs and outputs of a project. It enables the entrepreneur to understand at the initial
stage whether the project is sound on technical, economic, commercial and financial
parameters. It is also called as feasibility report (FR) and preparation of project report is
called as documentation.
According to Vasant Desai, a project report can be defined as “synchronization and
synthesis of relevant data in respect of a project which serves as a guide to management
and record merits and demerits in allocating resources to production of specific goods and
services”. It is based on preliminary or pre-investment report. The quality of appraisal or
investment decision largely depends upon the quality of project report. A project report
provides clues to all those pertinent questions such as ‘what, why, how, when and where’
of the project.
In short, a project report is a statement which contains a plan of action which is to be
materialized in the future by an entrepreneur. Project report preparation involves the
following:
1. Detailed time estimation and work schedule preparation
2. Detailed cost estimation and determination of fund phasing
3. Identification of potential supplier of resources
4. Computation of project viability
Objectives of preparing a project report
a. It facilitates project appraisal
b. It enables the entrepreneur to compare different investment proposals and select
most suitable project for him
c. It helps the entrepreneur in seeking financial assistance from financial institutions &
banks.
d. It identifies various constraints in the implementation of a project as regard resources
viz. financial, technical, manpower, etc well in advance
e. It facilitates the entrepreneur for planning business and the future course of actions
f. It helps in ensuring the entrepreneur confidence that he is proceeding in the right
direction
g. It provides the framework for presenting the same to govt. authorities for fulfilling
legal requirements and for availing itself of the facilities and concessional aid, etc
being made available
h. It acts as a guidebook for future projects as well as guide to the new project planners
and organizers.
i. It helps to analyze the extent of opportunities in the proposed investment
j. It helps to find out the total cost of investment as well as operational costs.
Uses of project report (Importance)
a. It helps in approaching district industrial centres for obtaining the provisional and
permanent registration for establishing an industrial unit
b. It helps in securing supply of scarce raw materials
c. It helps in approaching bank for getting working capital loans
d. It helps the entrepreneur in establishing the techno-economic viability of the project
e. It helps in procuring developed land from Directorate of industries or from concerned
development corporations
f. It highlights the practicability of a project in terms of different factors like economy,
finance, technology, and social desirability
g. It serves as handbook for reference, comparison, etc
h. It helps in checking lavish expenditure, wastes, inefficiency and irresponsible attitude
i. It helps in preventing the emergence of large number of sick units
j. It helps in minimizing risks in the execution of the project
Contents of project report
1. General information (Introduction) – It includes the following:
a. Objectives and scope of reports
b. Bio-data of promoters such as name and address of promoters, educational
qualification, work experience, project-related experience, investment
potential, interest in other concerns, etc
c. Industry profile such as past performance, present status of industry to which
the project belongs, the way it is organized, the problems it faces, etc
d. Constitution and organizational structure – Registration with the registrar of
firms or application for getting Regn. certificate from the Directorate of
industries or DICs
e. Product details – Utilities, advantages, range and design of the product over
its substitutes
2. Land – Location – locational advantages, criteria for selecting the location, lease or
freehold, actual requirements, value, type of soil, NOC from municipal corporation if
needed
3. Building – Type and cost of construction of administrative blocks and factory –
detailed plan and estimate along with plant layout – construction schedule
4. Plant and machinery – List of machinery with full description, size, type, source of
supply and cost – a layout plan of the machinery according to the process – cost of
miscellaneous assets
5. Availability of common facilities such as machine shops, welding shops and electrical
shops
6. Manufacturing process and technical know-how – selection of process, production
schedule, process flow chart, project network and production technique,
arrangements for acquiring technology, etc
7. Effluent disposal
8. Utilities – Source, availability, requirements, and cost estimates of arranging
electricity, steam, water, fuel, etc
9. Transport – Mode, requirements, potential means of transport, cost of internal roads,
distances to be covered, bottlenecks, etc
10. Communication – Feasibility of getting connections
11. Raw materials – List of raw materials, quantity requirements, sources of supply, its
price and properties
12. Manpower requirements – Requirement of skilled, semi-skilled personnel, technical
and non-technical personnel, administrative staff and marketing personnel; sources
and cost of procurement; alternatives available, etc
13. Products – Details of products to be produced – product mix and estimated annual
sales – product specifications, uses, application, standards and quality – competitors
and their capacities
14. Market position and trends – Installed capacity, end user of the product, major buyers,
area to be covered, production and anticipated demand, export prospects, price
structure and trends, etc
15. Marketing channels – Trading practices, distribution channels to be adopted and
marketing strategy, after sales services, seasonal stocking arrangements, etc
16. R&D activities to be undertaken
17. Capital cost and sources of finance – Estimate of fixed assets – internal and external
sources
18. Working capital – Requirements – arrangements made with commercial banks – need
for collateral security
19. Economic and social variables – abatement costs i.e. the cost of controlling the
environment damage; statements of social costs and benefits, etc
20. Cost of production and profitability
21. Break-even analysis
22. Pollution control system in operation – Scope of dumps, sewage system and sewage
treatment plant
23. Projected balance sheet and cash flow for 10 years
24. Ratio analysis
25. Schedule of the implementation of the project
26. Repayment schedule
27. General layout and flow sheets
28. Remarks
29. Declaration by the entrepreneur that the information, statements and figures are true
and correct
(Seal and Date) (Signature of
consultant)
Requisites of an ideal project report
i. Project report should be prepared with the help of an expert team
ii. It should be based on proper survey and systematic preliminary study of the project
iii. Assumptions in the project report should avoid extremities
iv. Project report is the means and not the end
v. Product demand, raw material availability, capital resources, labour resources, etc
must be estimated properly
vi. Thorough discussions must be made with experts before finalizing the report.
vii. Complete satisfaction of the entrepreneur should be ensured before the report is
submitted to the financial institutions
Problems faced in the preparation of project report
1) It is not always possible to complete the project report within the scheduled time. Time
overrun will lead to cost overrun.
2) Working capital assessment need not be always correct due to unrealistic
assumptions
3) Lending institutions insist on strict specifications with regard to size of land, buildings,
etc
4) They demand a lot of documents before credit is granted
5) Strict condition of promoters contribution may dampen the enthusiasm of
entrepreneurs
6) A number of clearances have to be obtained from the govt. departments. This causes
strain and time wastage among entrepreneurs
Evaluation of project report (Scope)
(Same as aspects of feasibility study)
Definition of Project Appraisal
Project appraisal means the assessment of the project. It is the process of estimating
the costs and benefits of a project to arrive at a investment decision. It is critical and
analytical evaluation of the project from different angles such as market, technical, financial,
economic, ecological, social, organizational, managerial and legal aspects. It is also called
as ex-ante analysis.
Since a project involves investment of scarce resources, an entrepreneur has to
appraise various alternatives projects before allocating the scarce resources for the best
project. Project appraisal helps to select the best project from among the available
alternatives. A project will be selected if its net benefits exceed those of the other alternative
projects.
Steps in project appraisal (new guidelines)
The Planning Commission (Now Niti Ayog) follows specific approach for project
Appraisal. In this regard, the Project Appraisal passes through following three stages:
1. Project formulation
2. Feasibility Study
3. Detailed project Report (DPR)
The investment proposals in the first two stages are handled by Public Investment
Board in order to arrive at a decision. The examination and clearance of Detailed Project
Report are referred by financial advisers in consultation with concerned administrative
ministries. It may result into revision in cost estimates. Due to this revision the difference
arises as regards the amounts approved at the stage of investment decision by PIB. It is
important to note that if the revised cost estimates exceed by more than 20% of the amount
approved, then the matter is again referred to the board.
STAGE 1:
a. First of all, the priority and position of the investment proposal in the context of the
five
year/ Annual plan is considered at preliminary and broad level.
b. The smooth functioning of this process requires close association of administrative
ministry with the planning commission because formulation stage should necessarily
be considered before the preparation of plans.
c. If foreign exchange implications of the project are serious, then the department of
economic affairs is also consulted.
d. Thereafter, a feasibility report is prepared considering the views of
i. Concerned agencies
ii. Administrative Ministry
iii. Public Investment Board
iv. Plan Finance of planning Commission
v. Project Approval Wing of Planning commission.
e. The feasibility report is prepared if the board directs so.
STAGE 2:
a. This stage is concerned with feasibility study.
b. In first stage, feasibility report is prepared on direction of Public Investment Board.
The
administrative ministry marks comments on the feasibility report prepared under
stage 1. The multiple copies of the report are made and these are sent to the
concerned financial adviser in the department concerned.
c. The financial adviser forwards these copies of feasibility report to the following
departments:
i. Plan Finance and project appraisal wing in Department of Expenditure
ii. Bureau of Public Enterprises
iii. Department of Economic Affairs
iv. Planning Commission
v. Any other agency deemed necessary.
d. The comments, to be made by above agencies, consider various important issues
like:
▪ Advisability of plan funds, desirability of diversion of plan funds to new projects from
those already on hand.
▪ The economic benefits of the project as distinct from financial returns.
▪ The advisability of undertaking the project in the public sector or joint sector or private
sector.
▪ Project's contribution to the social and economic objectives of the country.
▪ The plant capacity and investment timing in the light of demand and supply balance
including export possibilities.
▪ Crucial assumptions in the feasibility report which are likely to affect the performance
of the commissioned project in relation to the claims made thereon in the feasibility
report
STAGE 3:
a. The comments are received by Financial Adviser from all concerned departments as
listed above. A report is also prepared by Financial Adviser incorporating these
comments.
b. This report is forwarded to the Plan Finance and project Approval Wing (PFAP) in
Department of expenditure.
c. The PFAP prepares a final report after due consideration of essential points and
notes obtained from different agencies.
d. This final report is to be examined by PIB as regards the Financial and economic
characteristics of the proposed investment.
e. The Final decision is taken by the board. The board may decide
▪ To go ahead with the proposed investment or
▪ To drop it or
▪ To modify it.
Meaning and Definition of Project Formulation
Project formulation is the second step in the project management process. It can be
defined as the systematic arrangement and development of a project idea into concept and
realistic action plan with an objective of arriving at an investment decision. It enables the
entrepreneur to take decisions in a scientific way providing a concrete set of facts. It is also
called as project analysis
Project formulation is a process whereby the entrepreneur makes an objective and
independent assessment of the various aspects of an investment proposition of a project
idea for determining its total impact and also its liability. It involves careful, critical and
cautious look at a project idea and analyzing its various components, in order to formulate
an objective project in its totality. It provides a controlled mechanism for restricting
expenditure on project development.
Project formulation can be described as systematic examination of technical,
economic, managerial, financial, commercial, organizational and legal aspects of a project.
It saves the entrepreneurs themselves from a number of problems encountered by them
while establishing a new project.
In short project formulation is a process involving joint efforts of a group of experts
called as project team who should be familiar with the strategy, objectives and other
ingredients of the project. At the end of this stage, a project report is prepared for proper
implementation of the project
Definition of Project Team
From idea generation to implementation, a number of persons are involved in a
project. They are referred to as project team. All those persons who participate in a project
can be treated as members of the project team. These consist of experts from major
substantive fields of the project. Each member of the team should be familiar with the
strategy, objectives and other ingredients of the project. Depending on the situation and
size, a project team may comprise of the following members:-
1. One industrial economist
2. One market analyst
3. One or more technologist specializing in appropriate industry
4. One mechanical or technical engineer
5. One civil engineer, if needed
6. One management accounting expert
7. The govt. official who is authorized to grant clearance to the project
Feasibility analysis
Feasibility analysis is the process of evaluating the project idea within the limitations
and constraints of an entrepreneur. It is undertaken to determine whether a particular project
is worth going ahead with and evaluate the desirability of further investment in a project for
development. On the basis of this, a feasibility or project report is prepared which act as a
basis of sanctioning financial assistance by banks and other financial institutions.
When a project is taken up for development, 3 alternatives can arise. Firstly, the project
may appear to be +ve and in such a case the project assessing body can proceed to invest
further resources in pre-investment studies and design development. Secondly, if the
project turns out to be not feasible, further investment in project idea can be ruled out.
Thirdly if the data is not adequate for arriving at a decision, further information shall be
collected and suitable decisions be taken on the basis of the information’s collected. The
project feasibility analysis is carried out in 2 stages as explained below:
a. Prefeasibility study – The detailed techno-economic study will help to arrive at a
better decision, but it is costly and time-consuming affair. Therefore, before assigning
funds for such a study, a preliminary assessment of the project idea must be made. This
is known as prefeasibility study. The following are the objectives of prefeasibility study:
1. To determine whether the investment opportunity is so promising that an
investment decision can be taken on the basis of the information obtained at this
stage.
2. To decide whether the project concept justifies a detailed analysis by this stage
3. To see whether any aspect of the project is essential to its feasibility and whether
it necessitates any in-depth investigation through functional or support studies such
as market surveys, laboratory tests, pilot plan tests, etc.
4. To determine whether the information is adequate to realize that the project is
neither a viable proposition nor an attractive one for investors
b. Feasibility study – This is the most important stage in project analysis. It consists of
investigating the project from different aspects, viz. economic, technical, managerial,
legal, commercial, organizational, ecological, social and financial aspects. The relative
importance of these different aspects varies considerably depending on the type and
nature of the projects. These aspects are explained below in detail:
1. Commercial aspects (or Market and demand aspects) – Commercial analysis is
carried out to ascertain whether the project is commercially sound and viable one.
This helps to estimate the aggregate demand or potential size of the market for the
product proposed to be manufactured and get an idea about the market share that
is likely to be captured. For this purpose, the following factors are to be considered:
i. Consumption trend in the past and present consumption level
ii. Past and present supply position
iii. Production possibilities and constraints
iv. Imports and exports
v. Structure of competition
vi. Cost structure
vii. Elasticity of demand
viii. Consumer behaviour, intentions, motivations, attitudes, preferences and
requirements, etc
2. Technical aspects – Technical analysis is carried out to ascertain whether the
project is technically sound and viable one. It helps to determine whether the
necessary physical facilities required for production will be available and best
possible alternative is selected to procure them. For this purpose, the following
factors are to be considered:
i. Material inputs and utilities
ii. Manufacturing process
iii. Product mix
iv. Plant capacity
v. Manpower requirements
vi. Location and site of the project
vii. Machineries and equipment
viii. Housing requirements, etc
3. Financial aspects – Financial analysis is carried out to ascertain whether the
project is financially sound and viable one in meeting the burden of servicing debt
and whether the proposed project will satisfy the return expectations of those who
provide the capital. For this purpose the following factors are to be considered:
i. Cost of the project
ii. Means of financing
iii. Estimates of sales and production
iv. Cost of production
v. Working capital requirements and its financing
vi. Break even analysis
vii. Ratio and leverage analysis
viii. Projected cash flow statements/working capital statements/fund flow
statements/cost sheet/P&L account/ balance sheets
4. Managerial aspects – Managerial analysis is carried out to analyze the strength of
managerial or project team. The following factors are to be considered for
evaluating the project management team:
i. Professional skill and experience
ii. Dynamic attitude
iii. Administrative capability
iv. Risk bearing capacity
v. Frank and honest in dealings
vi. Clear conscience
vii. High ethical and moral standards
viii. High sense of involvement
5. Organizational aspects – Organizational analysis is carried out to analyze whether
the organization is capable of contributing to the proper implementation and
development of the project. For this purpose, the following factors are to be
considered:
i. Organization structure
ii. Recruitment
iii. Training
iv. Organization
6. Legal aspects – It refers to the political and labour considerations undertaken in
project analysis. Strikes, lockouts, industrial peace and communal harmony in the
area play a decisive role in examining failure or success of the project
7. Ecological aspects – Ecological analysis is done to ensure whether the project
causes pollution, whether it disturbs the equilibrium of ecology and whether it fits
into the environment. The project should be eco-friendly. It should be done
particularly for major projects, which have significant ecological implications like
power plants, irrigation schemes, and environmental polluting industries like bulk
drugs, chemicals and leather processing.
8. Social aspects – The project should aim at society’s wellbeing. The social
objectives of the project are to be considered keeping in view the interests of public.
The project which offers large employment potential, which are located in backward
area or projects which will stimulate small industries or the growth of ancillary
industries are to be given special consideration.
9. Economic aspects – Economic analysis help in ascertaining from the point of view
of the economy as a whole whether the project will reap benefits sufficiently greater
than the projects costs to justify investment in it. For this purpose, the following
factors are to be considered:
i. Past performance of the industry
ii. Its present status
iii. The type of organization the industry is having
iv. The constraints it may be facing
Significance of project formulation
a. It enables the entrepreneurs to take the most effective project decision
b. It helps in obtaining the necessary assistance from financial institutions
c. It helps the entrepreneur to allocate the scarce available resources among various
projects based on their importance and viability
d. It helps in obtaining govt. clearances and meeting the hurdles of procedural
formalities
e. It helps in overall national planning process
Project selection
After project formulation, the project ideas are converted into project profiles. A
project profiles consists of the following items:
a. Economic size
b. Status of industry
c. Availability of raw material
d. Cost of production
e. Capital cost
f. Utility requirements
g. Infrastructure facilities
h. Profitability
i. Govt. policy
After collecting and compiling the project profiles, the next task before the
entrepreneur is selecting the most appropriate project. The following criteria may be used
in the project selection:
1. Investment size based on entrepreneur’s financial capacity and attitudes towards
economies of scale
2. Location (see chapter SSI)
3. Available and proven indigenous technology -
4. Equipment and expertise of technical consultants and experienced persons
5. Marketing
6. Supply of power and water
7. Arrangement of working capital requirements
8. Minimizing unskilled or semi-skilled labour and also by using automatic material
handling devices
9. Economic viability – The project should attain BEP in the first 6 months. It should also
generate profit in the first stage of its operation.
Project planning
Project neither comes out of nothing, nor would they fall from the blue. They have to
be properly planned within the framework of national and state policies. However, the
entrepreneur is at freedom to fix priorities. It should justify the following:
a. To optimize use of scarce resources
b. To ensure optimization and better utilization of the existing resources
c. To achieve the pre-determined results
d. To be within the budgetary framework of a financing institution
Project planning starts with resource allocation framework for the firm’s investment
strategy and ends with rating the best project idea. Project planning can be defined as
developing the basis for managing the project, including the planning objectives, procedure,
organization, routines, finance and chain of activities. The following are the important areas
of planning:
a. Planning the project work or activities
b. Planning the manpower and organization
c. Planning the money
d. Planning the information system
Out of the above, financial planning is the most important aspect of project planning.
It deals with the financial aspects of a project. Finance is the most important pre-requisite
to launch an enterprise. It helps the entrepreneur to bring together the necessary inputs of
production such as land, labour, machine and raw materials and to combine them to
produce goods. Financial planning is financial forecasting made by the entrepreneur in the
beginning itself or at the time when project is formulated. While formulating an effective
financial plan, the entrepreneur should try to seek answers to the following 3 questions:
1. How much money is needed for the formulated project?
2. Where will the money come from? and
3. When does the money need to be available? (see sources of finance)
The financial requirement of a project can be estimated by developing a statement
of various assets required by the enterprise. The assets required may vary from enterprise
to enterprise depending on the nature of the products to be produced or services to be
rendered. Secondly, there are two ways for classifying the financial needs of a project. They
are given below:
i. On the basis of extent of permanence
a. Fixed capital needs – It includes investments to be made in fixed assets like
land, building, machinery, equipment, furniture, etc. These assets are
intended for permanent use in the business enterprise.
b. Working capital needs – It includes investments to be made in current assets
like raw material, finished goods, debtors, etc. These assets are intended for
day-to-day operations of a business enterprise
ii. On the basis of period of use
a. Long-term capital needs – It is generally arranged for more than 5 years. They
are usually treated as fixed capital.
b. Short-term capital needs – It represents borrowed capital whose repayment is
usually to be made within one year only. They are usually treated as working
capital.
