Dire Dawa University

ድሬ ዳዋ ዩኒቨርሲቲ

Institute of Technology
ድሬ ዳዋ ኢንስቲትዪት ቴክኖሎጂ

Dire Dawa University Institute of Technology

School of Mechanical and Industrial Engineering

Production and Operation Management (IEng6101)

Assignment 1
Biniyam Abebe
Id No:
DDU 1601301
Submitted To:
Dr. Hiluf Reda (Ass.Prof.)

February 2024
Dire Dawa, Ethiopia
 Assignment-
Q1. Discuss the six broad phases of capital budgeting
Answer
The capital budgeting process typically consists of six broad phases. These phases help
businesses make informed decisions about their investments and ensure that they align with the
company's growth goals and financial objectives. The six phases of capital budgeting are as
follows:
1. Identification of Investment Opportunities: In this phase, businesses identify potential
investment opportunities that align with their strategic objectives and growth targets. This
involves monitoring the external environment, conducting SWOT analysis, and gathering
suggestions from employees.
2. Gathering Investment Proposals: Once the investment opportunities are identified, businesses
collect investment proposals from various departments or individuals within the organization.
These proposals are evaluated by authorized personnel to ensure they meet the requirements and
objectives of the company.
3. Project Selection: In this phase, executives and decision-makers review the investment
proposals and select the projects that will be included in the capital budget. The decision-making
process may consider factors such as expected returns, risk assessment, and alignment with the
company's strategic goals.
4 After the projects are selected, the investment outlays are classified into higher and smaller
investments. Smaller investments approved at lower management levels may be covered with
blanket appropriations to expedite the process. This phase involves estimating the cost of
investments and allocating the necessary funds.
5. Implementation: Once the preparatory steps are completed, the approved investment proposals
are implemented. This phase involves converting the proposals into concrete projects and
executing them according to the project plan. Successful implementation requires proper project
formulation and the use of project management techniques such as the critical path method
(CPM) and program evaluation and review technique (PERT).
6. Performance Review: The final phase of capital budgeting involves reviewing the
performance of the capital budgeting projects. This review compares the actual results of the
projects with the projected outcomes. It helps management assess the success of the investments
and make any necessary adjustments or improvements for future projects.
Q2. Discuss about project market & demand analysis, technical analysis, financial
estimation and benefit projections.
a. Market and Demand Analysis:
Project market and demand analysis involves evaluating the market conditions and determining
the demand for a particular project or product. This analysis helps in understanding the potential
customer base, competition, and market trends. The following steps can be followed for market
and demand analysis:
1. Identify the target market: Determine the specific segment or group of customers who are
likely to be interested in your project. Consider factors such as demographics, geographic
location, and psychographics.
2. Analyze the competition: Understand the existing competitors in the market and their
offerings. Evaluate their strengths, weaknesses, and market share. Identify any gaps or
opportunities that your project can address.
3. Conduct market research: Gather data through surveys, interviews, and secondary research to
understand customer preferences, needs, and buying behavior. Analyze market trends, growth
rates, and potential barriers to entry.
4. Estimate market size and demand: Use the gathered data to estimate the size of the target
market and the potential demand for your project. This can be done by considering factors such
as population size, consumer spending patterns, and market growth projections.
Technical Analysis:
Technical analysis involves assessing the technical aspects of a project, such as its feasibility,
scalability, and implementation requirements. This analysis helps in determining the project's
technical viability and identifying any potential challenges. Consider the following steps for
technical analysis:
1. Define project requirements: Clearly define the project's objectives, scope, and technical
requirements. Identify the necessary resources, technologies, and infrastructure needed for
successful implementation.
2. Assess technical feasibility: Evaluate the project's feasibility in terms of available technology,
expertise, and resources. Determine if the required technical components can be developed or
acquired within the project's constraints.
3. Identify potential risks and challenges: Analyze the potential technical risks and challenges
that may arise during the project's execution. Consider factors such as compatibility issues,
security concerns, and scalability limitations.
4. Develop an implementation plan: Create a detailed plan outlining the technical
implementation process. Define milestones, timelines, and resource allocation. Consider factors
such as software development, hardware procurement, and integration requirements.
Financial Estimation and Benefit Projections:
Financial estimation and benefit projections involve forecasting the project's financial aspects,
such as costs, revenues, and potential benefits. This analysis helps in assessing the project's
financial viability and determining its potential return on investment. Follow these steps for
financial estimation and benefit projections:
1. Estimate costs: Identify and estimate all the costs associated with the project, including
development, production, marketing, and operational expenses. Consider both one-time costs
(capital expenditures) and recurring costs (operating expenses).
2. Project revenues: Based on market research and demand analysis, estimate the potential
revenues the project can generate. Consider factors such as pricing strategy, sales volume, and
market share.
3. Calculate profitability: Calculate the project's profitability by subtracting the estimated costs
from the projected revenues. Assess the profitability over different time periods, such as
monthly, annually, or the project's lifespan.
4. Assess financial metrics: Calculate financial metrics such as return on investment (ROI), net
present value (NPV), and internal rate of return (IRR) to evaluate the project's financial
attractiveness. Compare these metrics against industry benchmarks to assess the project's
performance.
5. Benefit projections: Identify and quantify the non-financial benefits the project can bring, such
as increased market share, enhanced brand reputation, or improved operational efficiency. Assess
the potential impact of these benefits on the overall project value

Q3. What aspects are considered in technical analysis?

In project technical analysis, various aspects are thoroughly examined to determine the
feasibility and viability of the project. These aspects encompass a wide range of considerations,
ensuring that all necessary factors are taken into account. The key aspects considered in project
technical analysis are as follows:

1. Material Inputs and Utilities:

This aspect involves defining the specific requirements for materials and utilities that will be
used in the project. It includes identifying the types and quantities of materials needed and
specifying the properties they must possess. Additionally, a reliable supply channel for procuring
the required materials and utilities is established.

2. Manufacturing Process/Technology:
Selecting the appropriate manufacturing process and technology is crucial for the success of the
project. Factors such as plant capacity, material inputs, production cost, and product mix are
considered in this analysis. Evaluating the ease of adopting the chosen process and technology as
well as assessing potential technological obsolescence are also important aspects.

3. Product Mix:
Choosing an effective product mix is essential to meet market requirements and maximize
customer satisfaction. This aspect involves considering different customer preferences and needs.
Ensuring the quality of products and maintaining flexibility in production are also taken into
account to adapt to changing market demands.

4. Plant Capacity:
Determining the capacity of the plant involves assessing the volume or number of units that can
be manufactured within a given time period. Factors such as installed capacity, technical
conditions, and resource availability are considered. The analysis aims to determine feasible
normal capacity and nominal maximum capacity based on the project requirements.

5. Location and Site Development:

Selecting the optimal location for the project is critical. This aspect involves conducting a
thorough assessment of factors such as demand, plant size, and input requirements. Proximity to
markets, availability of raw materials and labor, and existing infrastructure are considered.
Climatic conditions, waste disposal mechanisms, and government policies are also evaluated to
ensure compliance and minimize operational challenges.

6. Machinery and Equipment:

The selection of appropriate machinery and equipment is vital for smooth project operations.
This aspect includes considering factors such as the production technology and plant capacity
requirements. Evaluating power availability, transportation logistics, ease of use, and import
policies are also part of this analysis. Procurement methods, such as sourcing machinery from
different suppliers or entering into turn-key contracts, are determined.
7. Structures and Civil Works:
Preparing and developing the project site is essential for constructing the necessary
infrastructure. This aspect involves activities such as constructing factory buildings, ancillary
structures, and other essential facilities. Compliance with environmental rules and regulations is
given due consideration to ensure sustainability and minimize any potential negative impact.

8. Projects Charts and Layouts:

Creating charts and layouts is a crucial step in defining the scope of the project. This aspect
provides a basis for detailed project engineering and accurate cost estimation. Different types of
layouts, such as general function layout and production line diagrams, are considered to optimize
the project layout and enhance operational efficiency.

Q4. Explain the tools of portfolio planning.

Portfolio planning involves the process of selecting and managing a collection of projects or
investments to achieve specific objectives. There are several tools that can be used in portfolio
planning to help organizations make informed decisions and optimize their portfolio. Here are
some commonly used tools:

1. Strategic Alignment Matrix: This tool helps assess the alignment of projects with the
organization's strategic goals and objectives. It categorizes projects based on their strategic fit
and helps prioritize projects that align closely with the organization's strategic direction.
2. Risk Assessment Matrix: This tool evaluates the potential risks associated with each project in
the portfolio. It assesses the likelihood and impact of risks and helps identify high-risk projects
that require additional attention or mitigation strategies.
3. Financial Analysis Tools: These tools help evaluate the financial viability of projects in the
portfolio. They include techniques such as net present value (NPV), return on investment (ROI),
and cost-benefit analysis. Financial analysis tools enable organizations to assess the profitability
and financial impact of projects and make informed investment decisions.
4. Resource Capacity Planning Tools: These tools help organizations assess their resource
capacity and allocate resources effectively across projects. They consider factors such as
resource availability, skills, and workload to ensure that projects are adequately staffed and
resources are utilized optimally.
5. Project Prioritization Matrix: This tool helps prioritize projects based on predefined criteria
such as strategic importance, financial impact, resource requirements, and risk. It provides a
systematic approach to rank projects and allocate resources to those with the highest priority.
6. Decision Trees: Decision trees are graphical tools that help analyze the potential outcomes and
uncertainties associated with different project options. They assist in evaluating the expected
value of different alternatives and making decisions based on probabilities and potential
outcomes.
7. Portfolio Dashboard: A portfolio dashboard provides a visual representation of key
performance indicators (KPIs) and metrics for the projects in the portfolio. It allows stakeholders
to monitor the progress, performance, and health of individual projects and the overall portfolio.
These tools can be used individually or in combination to support portfolio planning and
decision-making processes. Each tool provides specific insights and analysis to help
organizations optimize their project portfolios and achieve their strategic objectives.

Q4. Discuss the various strategies for growth, stability and concentration.
Strategies for growth, stability, and concentration are important considerations for businesses
looking to achieve long-term success. These strategies help businesses navigate the competitive
landscape, expand their market presence, and maintain a stable position in the industry. Let's
discuss each of these strategies in detail.

1. Growth Strategies:
Market Penetration: This strategy involves gaining additional market share within existing
markets by using existing products. Companies often rely on advertising and promotional
activities to attract new customers.
Market Development: This strategy focuses on selling existing products in new markets.
Companies may enter new retail channels or target different customer segments to expand
their reach.
Product Development: This strategy involves creating new products or modifying existing
ones to cater to the needs of existing markets. Companies innovate and introduce new
offerings to attract customers and stay ahead of competitors.
Diversification: This strategy involves entering new markets with new products. It can be
either related diversification, where the new market and product are somewhat connected to
the existing business, or unrelated diversification, where the new market and product are
completely different from the existing business
2. Stability Strategies:
Status Quo: This strategy focuses on maintaining the current position in the market without
significant changes. Companies may choose this strategy when they are satisfied with their
current market share and profitability
 This strategy involves protecting the existing market share and profitability by implementing
defensive measures. Companies may focus on cost-cutting, improving operational efficiency,
or strengthening customer relationships to maintain stability.
Maintenance: This strategy aims to maintain a stable market position by continuously
monitoring and adapting to market changes. Companies may invest in research and
development, customer feedback, and market analysis to stay competitive.

3. Concentration Strategies:

Vertical Integration: This strategy involves acquiring or merging with companies in the
supply chain or distribution channels. It allows companies to control the entire value chain,
reduce dependency on external suppliers, and improve efficiency.
Concentric Diversification: This strategy involves entering new markets that are related to
the existing business. Companies leverage their core competencies and capabilities to expand
into new but related industries
Conglomerate Diversification: This strategy involves entering new markets that are
unrelated to the existing business. Companies diversify their portfolio to reduce risk and take
advantage of new growth opportunities.

It's important for businesses to carefully evaluate these strategies based on their specific goals,
resources, and competitive landscape. A combination of these strategies may be employed to
achieve growth, stability, and concentration.

Q6. Describe briefly the general sources of secondary information available in Ethiopia.

In Ethiopia, there are various sources of secondary information available that can provide
valuable insights and data for research, analysis, and decision-making. These sources include:

Government Reports and Publications: The Ethiopian government produces a wide range of
reports and publications on various topics such as economic development, agriculture,
education, health, infrastructure, and social issues. These reports can be accessed through
government websites, ministries, and agencies
Non-Governmental Organizations (NGOs): NGOs operating in Ethiopia, both local and
international, often publish reports and studies on various aspects of development, human
 rights, social issues, and specific sectors such as education, healthcare, and agriculture.
Examples of NGOs in Ethiopia include Human Rights Watch and Amnesty International.,
Intergovernmental Organizations (IGOs): IGOs like the United Nations (UN) and the African
Union (AU) also provide valuable secondary information on Ethiopia. These organizations
conduct research, publish reports, and provide data on various topics such as economic
development, poverty reduction, health, and education
Academic Institutions: Universities and research institutions in Ethiopia conduct studies and
publish research papers on a wide range of subjects. These academic publications can
provide in-depth analysis and insights into specific topics and sectors 5. Market Research
Reports: Market research firms and consulting companies often produce reports on various
industries and sectors in Ethiopia. These reports provide market analysis, consumer behavior
insights, and industry trends .
International Organizations: International organizations such as the World Bank,
International Monetary Fund (IMF), and the World Health Organization (WHO) publish
reports and data on Ethiopia's economic indicators, development projects, health statistics,
and more
Online Databases and Portals: Online databases and portals like the Ethiopian Development
Research Institute (EDRI), Ethiopian Economics Association (EEA), and the Central
Statistical Agency (CSA) provide access to a wide range of research papers, publications,
and statistical data.
TV , Magazines and radio

Q7. Show how the various financial estimates and projections are inter-related
Financial estimates and projections are inter-related in the sense that they both involve predicting
future financial outcomes. While they have some similarities, there are also key differences
between the two.
Financial estimates:
Financial estimates are based on historical and current performance data, as well as
internal and external factors.
They aim to estimate the likeliest future outcomes for a company based on available
information at the time
Financial estimates are typically focused on the immediate future, such as the upcoming
months, quarter, or year
They are used to inform strategic and operational decisions for the near future
 Financial estimates rely on data-driven, AI-powered analytics tools to analyze and
interpret the available data

Financial projections:
Financial projections are predictive analyses that explore potential business outcomes of
hypothetical events or decisions -.They involve scenario analysis to consider likely
outcomes, best outcomes, and worst outcomes, as well as how the company would handle
each one
Financial projections often look more than a year ahead or even several years ahead to
determine how a company will navigate certain events
Projections help companies evaluate risk, compare strategy options, and proactively prepare
for potential situations. They play a bigger role in driving long-term strategy and company
resilience
Like financial estimates, financial projections also rely on data-driven, AI-powered analytics
tools to perform sophisticated analyses and provide insights based on multiple variables.
Inter-relationship between financial estimates and projections:
Financial estimates provide the foundation for financial projections. They serve as the starting
point by providing historical and current data that can be used to make projections about the
future..
Financial projections build upon the estimates by considering hypothetical scenarios and
exploring potential outcomes based on different variables and assumptions
Both financial estimates and projections require the use of data-driven, AI-powered analytics
tools to analyze large datasets and generate insights The accuracy and reliability of financial
estimates can impact the accuracy and reliability of financial projections. Therefore, it is
important to ensure that the estimates are based on reliable data and sound analysis

Q7. Describe briefly the various means of financing a project.

There are several means of financing a project, depending on the nature of the project and the
availability of resources. Here are some common methods of project financing:

1. Equity Financing: Equity financing involves raising funds by selling shares or ownership
stakes in the project to investors. The investors become shareholders and have a claim on the
project's profits and assets. This method is commonly used for large-scale projects where the
initial capital requirement is high. Equity financing allows the project to share the financial risk
with investors and can provide access to additional expertise and resources.

2. Debt Financing: Debt financing involves borrowing money from lenders or financial
institutions. The project takes on debt and agrees to repay the principal amount along with
interest over a specified period of time. This method is suitable for projects with predictable cash
flows and a strong credit profile. Debt financing provides the advantage of retaining full
ownership and control of the project but comes with the obligation to make regular interest and
principal payments.

3. Public Funding: Public funding refers to financing provided by government entities or public
institutions. This can include grants, subsidies, or loans with favorable terms. Public funding is
often used for infrastructure projects or projects that have a significant public benefit.
Governments may provide financial support to stimulate economic growth, address social needs,
or promote sustainable development. Public funding can reduce the financial burden on the
project and provide access to additional resources.

4. Private Financing: Private financing involves raising funds from private investors or financial
institutions. This can include venture capital, private equity, or loans from private lenders.
Private financing is commonly used for startups or projects that may not qualify for traditional
bank loans. Private investors may be attracted to projects with high growth potential or
innovative ideas. Private financing can provide flexibility in terms of deal structures and
investment terms.

5. Project Bonds: Project bonds are debt instruments issued specifically to finance a project.
These bonds are backed by the cash flows generated by the project and are typically repaid from
project revenues. Project bonds are often used for large infrastructure projects with stable cash
flows. Investors who purchase project bonds receive regular interest payments and the return of
principal upon maturity. Project bonds can attract institutional investors seeking long-term,
steady returns.

6. Crowdfunding: Crowdfunding is a method of financing where a large number of individuals

contribute small amounts of money to fund a project. This is typically done through online
platforms that connect project creators with potential investors. Crowdfunding is commonly used
for creative projects, social initiatives, or small-scale ventures. It allows project creators to reach
a wide audience and validate their ideas while providing supporters with a sense of participation
and potential rewards.

7. Supplier Financing: Supplier financing involves negotiating favorable payment terms with
suppliers or vendors. This allows the project to defer payment until the project generates revenue
or reaches a certain milestone. Supplier financing can help manage cash flow and reduce the
need for external financing. It provides the project with goods or services upfront while allowing
the project to generate income before making payments. Supplier financing can be particularly
useful in industries with long production or construction cycles.

These are some of the common methods of project financing. The choice of financing method
depends on factors such as the project's size, risk profile, expected returns, and the availability of
financing sources. It is common for projects to utilize a combination of financing methods to
meet their funding needs.

Q8. Describe briefly the various means of financing a project

There are several means of financing a project, which can be categorized into different types.
Here are some common means of financing a project:
1. Equity Financing:
- Share Capital: This refers to the capital raised by a company through the issuance of shares. It
can be in the form of equity shares or preference shares 2. Debt Financing:
- Term Loan: This is a loan provided by financial institutions or commercial banks for
financing new projects or expansion, modification, and renovation schemes. It can be in the form
of rupee term loans or foreign currency term loans
- Debenture Capital: Debentures are financial instruments used to raise long-term debt capital.
They can be non-convertible debentures, which are straight debt instruments with a fixed rate
and maturity period, or convertible debentures, which can be converted into equity shares after a
fixed period of time
3. Government Support:
- Incentive Sources or Government Subsidies: Governments at various levels may provide
incentives or subsidies to support project financing .
4. Supplier Financing:
- Suppliers Line of Credit: Suppliers may offer a line of credit to finance the project, allowing
the company to defer payment for goods or services received
5. Other Financing Options:
 - Deferred Credit: This refers to credit extended by suppliers or lenders, allowing the borrower
to defer payment for a certain period of time means/
- Unsecured Loans and Deposits: Companies may obtain unsecured loans or deposits from
individuals or financial institutions to finance the project
- Leasing and Hire Purchase: Companies can opt for leasing or hire purchase agreements to
acquire assets needed for the project, paying periodic installments instead of upfront payment

It's important to note that the choice of financing means depends on factors such as the nature of
the project, the financial position of the company, and the availability of funds.

Q9. Why does money have time value?

Money has time value due to several reasons:
1. Inflation: Inflation is the general increase in prices of goods and services over time. As
inflation erodes the purchasing power of money, a dollar today is worth more than a dollar in the
future. This means that money today can be invested and earn interest, which increases its value
over time.
2. Interest:*Interest is the compensation paid for the use of borrowed money. When you lend
money, you expect to receive interest payments in return. The interest earned on investments or
savings accounts increases the value of money over time.
3. Opportunity Cost: Money has time value because of the concept of opportunity cost. When
you choose to invest money in one option, you give up the opportunity to invest it in other
alternatives. The potential returns from the foregone opportunities represent the opportunity cost
of holding money.
4. Risk and Uncertainty: The value of money is also influenced by risk and uncertainty.
Investments with higher risk typically offer higher potential returns, while safer investments
provide lower returns. The time value of money takes into account the risk and uncertainty
associated with different investments.
5. Future Value and Present Value The time value of money allows us to calculate the future
value of a present investment or the present value of a future cash flow. This is important for
financial planning, budgeting, and investment decisions.
6. Compounding: Compounding is the process where interest earned on an investment is
reinvested, and it earns interest itself. Over time, compounding can significantly increase the
value of an investment.
7. Discounted Cash Flow (DCF) Analysis: DCF analysis is a financial valuation method that uses
the time value of money to assess the present value of future cash flows. It is widely used in
capital budgeting and investment appraisal to determine the profitability and viability of projects.
Understanding the time value of money is crucial for making informed financial decisions,
planning for the future, and achieving financial goals.

Q10. What is NPV, IRR, payback period?

NPV, IRR, and payback period are commonly used financial metrics in capital budgeting to
evaluate the profitability and feasibility of investment projects.

1. Net Present Value (NPV):

- NPV is a financial metric that calculates the present value of expected cash flows from an
investment project, discounted at a specified rate of return.
- It measures the net value or profitability of an investment by comparing the present value of
cash inflows to the present value of cash outflows.
- A positive NPV indicates that the project is expected to generate more cash inflows than
outflows and is considered financially viable.
- A negative NPV suggests that the project may not generate sufficient returns to cover the
initial investment and is generally considered unfavorable.
- NPV takes into account the time value of money, as it discounts future cash flows to their
present value.
- It is often used as a primary decision-making tool in capital budgeting

2. Internal Rate of Return (IRR):

IRR is another financial metric used to evaluate the profitability of an investment project.
It is the discount rate at which the present value of cash inflows equals the present value of
cash outflows, resulting in a net present value of zero.
 In other words, IRR is the rate of return that makes the NPV of an investment project
zero.
 If the IRR is greater than the required rate of return or hurdle rate, the project is
considered financially viable.
 If the IRR is lower than the required rate of return, the project may not generate
sufficient returns to cover the initial investment and is generally considered
unfavorable.
 IRR helps in comparing different investment opportunities and selecting projects with higher
rates of return. However, IRR has limitations, such as multiple IRRs for complex cash flow
patterns and difficulties in interpreting the results
3. Payback Period:
The payback period is a simple financial metric that measures the time required to recover the
initial investment in an investment project. It calculates the length of time it takes for the
cumulative cash inflows to equal or exceed the initial investment. The payback period is often
used as a quick assessment tool to evaluate the liquidity and risk of an investment. A shorter
payback period is generally preferred, as it indicates a faster recovery of the initial investment.
However, the payback period does not consider the time value of money and does not provide
information about the profitability of the project beyond the payback period.
- It is commonly used as an initial screening tool before conducting more detailed financial
analysis

Q11. Show why NPV of a simple project decreases as the discount rate increases.

The NPV of a simple project decreases as the discount rate increases due to the time value of
money.
The time value of money states that money today is worth more than the same amount of money
in the future. This is because money today can be invested and earn interest, so it grows in value
over time.

When a project's cash flows are discounted at a higher rate, the present value of future cash
flows decreases. This is because the higher discount rate places a greater weight on the
earlier cash flows, which are closer to the precent, and less weight on the later cash flows,
which are further away.

As a result, the NPV of the project decreases as the discount rate increases. This is because the
present value of the project's future cash flows is worth less at a higher discount rate.
Here is a simple example:

Consider a project that has two cash flows: $100 in year 1 and $110 in year 2. The i9 I ui8 i8k
kim kj j iu ikm ik ijm m km ikm km kim project's initial investment is $100.

If the discount rate is 5%, the NPV of the project is:

NPV = -$100 + $100 / (1+0.05) + $110/(1+0.05)^2
= -$100 + $95.24 + $100.78
= $96.02
If the discount rate is increased to 10%, the NPV of the project is:
NPV = -$100 + $100/(1+0.10) + $110/(1+0.10)^2
= -$100 + $90.91 + $95.63 = $86.54
As you can see, the NPV of the project decreases from $96.02 to $86.54 as the discount rate
increases from 5% to 10%. This is because the present value of the project's future cash flows
is worth less at a higher discount rate.
In general, the higher the discount rate, the lower the NPV of a project. This is because the time
value of money means that future cash flows are worth less than present cash flows. = $96.02 12.

Q12. What is the basic difference between PERT and CPM?

The basic difference between PERT (Program Evaluation and Review Technique) and CPM
(Critical Path Method) lies in their focus and application. Here are the key differences between
PERT and CPM:
1. Focus: PERT primarily focuses on time planning and time management, with the goal of
delivering the project as quickly as possible. On the other hand, CPM focuses on both time and
budgeting, making it useful for bringing the project in on budget as well as on time.
2. Uncertainty vs. Certainty: PERT is suitable for projects where the time required to complete
different activities is uncertain. It is often used for projects that involve research and
development. In contrast, CPM is used for projects where the time needed for completion is
already known and certain. It is commonly used in construction projects.
3. Orientation: PERT is event-oriented, meaning that the network is constructed based on events.
On the other hand, CPM is activity-oriented, meaning that the network is constructed based on
activities.
4. Model: PERT uses a probabilistic model, taking into account three time estimates: optimistic
time, most likely time, and pessimistic time. CPM, on the other hand, uses a deterministic model,
relying on a single time estimate.
5. Time vs. Time-Cost Trade-off: PERT focuses primarily on time, with meeting time targets or
estimating percent completion being more important. In contrast, CPM focuses on the time-cost
trade-off, where minimizing costs is more important.

6. Precision of Time Estimation: PERT is appropriate for high precision time estimation. It is
designed to handle projects where time estimation requires a higher level of accuracy. CPM, on
the other hand, is suitable for reasonable time estimation.
7. Nature of Jobs: PERT is suitable for projects with a non-repetitive nature of jobs. It is often
used for projects that involve unique or one-time activities. CPM, on the other hand, is suitable
for projects with a repetitive nature of jobs. It is commonly used in projects with recurring
activities.
8. Crashing: PERT does not involve crashing, as there is no certainty of time. Crashing refers to
a compression technique used in CPM to shorten the project duration with the least additional
cost. Therefore, CPM allows for the possibility of crashing to meet specific time constraints.

14. Draw the network diagram for an industrial project with which you are familiar.
 Addis –Djibouti Railway project

F
C

A B D G H I

E H

Activities

Activities ID Activities Predecessor Duration (Month)

A Pre-feasibility Design None 24
B Site preparation A 6
C Civil work B 36
D Electrical Work C 6
E Mechanical Works D 6
F Civil quality Assurance and revision E 3
G Electrical Work Quality and Revision F 3
H Commissioning and Review G 2
I Ready For Rail H 1
Q15. Mr. Abebe plans to send his son for higher studies abroad after 10 years.
He expects the cost of these studies to be Birr 1000,000. How much should he save
annually to have a sum of Birr 1000,000 at the end of 10 years, if the interest rate is 12
percent?

Answer
FV =Pv (1+i)n
1,000,000= Pv (1+0.12)10
P v = 1,000,000/1.1210
P v= 321973.2
FVIFA (12%, 10 years) = 1,000,000
A x 17.549 = 1,000,000
So, A 1,000,000 / 17.549 =56, 983 Birr

Q16. Sulabh International is evaluating a project whose expected cash flows are as
follows:

Year Cash flow

0 1,000,000
1 100,000
2 200,000
3 300,000
4 600,000
5 300,000

a. What is the NPV of

b. The project, if the discounted rate is 14 percent for the entire period?
What is the NPV of the project if the discount rate is 12 percent for year 1 and rises every
year by 1 percent?

Answer
NPV = ∑

Where = = Cash flow at time t

r= Discount rate
t= time period

Answer

a. NPV = = + + + +

NPV= (-1,000,000) + 955163.02

NPV = -44836.97
b. NPV = (-1,000,000) + ⁄ + ⁄ +

⁄ + ⁄ + ⁄

Therefore, NPV= -1,000,000+ 934292.35= -65,707.64

Q.17 what is the internal rate of return of an investment which involves a current outlay of
$300,000 and results in annual cash inflow of $60,000 for 7 years?

Answer

IRR = ∑ $ 60,000 = ⁄ 7

⁄ = (1+r)7

1+r = √ 5 = 1.14 -1=0.14x100=14% = r

r = 0.14 = 14%
Q18 A project consists of the following activities represented in terms of preceding and
succeeding events. Draw its network diagram

Activity Mean time (weeks)

(1,2) 4
(1,3) 2
(1,4) 3
(2,4) 5
(3,4) 6
(4,5) 2
(5,7) 3
(2,5) 1
(4,7) 5

Answer

2
4
1 5
2 1
3
3
6

4 2 5 3
7

5
Q19. Lexis has experience the following demand for storage water heaters for the last six
months: July-300, September-400, October-500, November-600, and December700.
Determine the forecast for January. Take order of moving average as 3.

Answer
Demand of July = 300, Demand of September = 400, Demand of October = 500, Demand of
November= 600, Demand of December = 700,
Forecast = ⁄

Forecast of January = ⁄ = ⁄ = ⁄
Forecast of January = 600

Q20. The demand and forecast for February are 12,000 and 10,275, respectively. Using
single exponential smoothing method (smoothing coefficient = 0.25), forecast for the month
ofMarch is
Answer
Given Forecast of February = 10,275, Demand of February = 12,000
Ft =
Forecast for March = 0.25 x 12,000 + (1-0.25) x 10,275 = 10,706.25
Forecast for March = 10,706.25

Q20. Maxus Sales Corporation is in the business of selling laptops. Following table enlist
sales of laptops in respective quarters.
Quarter Sales Quarter Sales
1 600 7 2600
2 1550 8 2900
3 1500 9 3800
4 1500 10 4500
5 2400 11 4000
6 3100 12 4900

Use regression analysis to find forecast for the next 4 quarters.

Solution
a. Obtain a regression equation for the data

To find the linear regression, we need to calculate the slope (b) and the y-intercept (a) of the
line that best fits the data. We can use the following formulas:
Linear regression can be expressed

Let s denote the dependent and independent variable

y = a +bx
Where y is the dependent variable
x is independent variable
b is slope of the line
a is the y- intercept , which the value of y when x is equal to zero

Sn. No Sales (y) Quarter (x)

1 600 1 600 360000 1

2 1550 2 3100 2402500 4

3 1500 3 4500 2250000 9

4 1500 4 6000 2250000 16

5 2400 5 12000 5760000 25

6 3100 6 18600 9610000 36

7 2600 7 18200 6760000 49

8 2900 8 23200 8410000 64

9 3800 9 34200 14440000 81

10 4500 10 45000 20250000 100

11 4000 11 44000 16000000 121

12 4900 12 58800 24010000 144

Sum =33350 =112502500 = 650

= 6084 =268200

Mean ȳ = 2779.17 ẍ = 6.5

 Table: computation result for regression
The sum of sales = ∑ = 333350 Birr =26 8200, → = 6084
= 650 N = 12 =33350
Then the slope and intercept value obtained by

∑ ∑ ∑
b=

a = ȳ -b ẍ
Then,
∑ ∑ ∑
b= = = 352.2

Mean for y and x value obtained by using the following equation

∑ ∑
Mean = = 2779.17 Mean = = 6.5

Therefore
a = ȳ -b ẍ = 2779.13 – 352.2 × 6.5 = 489.7
Finally
y = a +bx

y = 489.7+ 352.2 2x

a. Forecasting for quarter 1, x = 13

y = 489.7+ 352.2 ×13 = 5068.3 Birr

b. Forecast for Quarter 2 , x = 14
y = 489.7+ 352.2 ×14 = 5420.5 Birr

c. Forecast for Quarter 3 , x = 15

y = 489.7+ 352.2 ×15= 5777.2 Birr

d. Forecast for Quarter 4 , x = 16

y = 489.7+ 352.2× 16 = 6121.7 Birr