Project Analysis and

Evaluation
1
AcFn 3202

Addis Ababa University School of Commerce

2 Chapter 1: Introduction to Project
 Definition of a project
 Characteristics/features of projects
 Projects Vs Operations
 Project Stakeholders
 Project Classification
 National development planning & projects
 Project Management
 Project Organization Structure
Addis Ababa University School of Commerce
1.1Definition of a project
What is a “Project?”

 An endeavour in which human (or

machine), material and financial
resources are organised in a novel way,
to undertake a unique scope of work,
or given specification, within
constraints of cost and time, so as to
deliver beneficial change by
quantitative and qualitative
objectives”
 What is a “Project?”

A series of activities and tasks that

have
 SCOPE

 TIME

 RESOURCES (Cost)
 The Three Project Constraints:

 SCOPE: What work will be done?

 TIME: How long should it take to
complete?
 RESOURCES: What resources should
be committed?
 Project Triangle

SCOPE TIME

RESOURCES
7 1.2 Characteristics/features of projects
• Project involves the investment of scarce resources in
expectation of future benefits
• Involves a single definable purpose or end-item
• Every project is unique
• Has a defined life span with a beginning and an end.
• A project is a temporary activity – doesn’t mean short
duration
• A project utilises skills and talents from multiple
organisations and professions
• A project has a risk
• Completed by a team of people – Team spirit
• Dynamic in nature
Project analysis and evaluation 05/27/2025
8 Examples of a project
 Developing a new product or service
 Effecting a change in the structure, staffing,
or style of an organization
 Developing or acquiring a new or modified
accounting information system
 Constructing a building or infrastructure
 Building a water system for a community
 Running a campaign for political office

Project analysis and evaluation 05/27/2025

9 1.3 Projects Vs Operations
Project
Operations
1. New process or product 1. Repeat process or product
2. One objective 2. Several objectives
3. On-going
3. One shot – limited life
4. People are homogeneous
4. More heterogeneous 5. Systems in place
5. Systems must be created 6. Performance, cost, & time known
6. Performance, cost & time less 7. Part of the line organization
certain 8. Follows established practice
7. Outside of line organization
8. Violates established practice

Project analysis and evaluation 05/27/2025

10 Exercise: Project or operation?
 Writing a term paper for student
 Building a new classroom
 Taking class notes
 Cleaning classrooms
 Developing a new accounting information system
 Entering transactions in accounting ledger
 Processing insurance claims
 Producing automobiles
 Preparing HRM policy manual
 Monitoring service quality
 Handling client complaints
 Developing a customer
Addis Ababa University School of Commerce handling system
 1.4 Project Stakeholders
11
stakeholders
• Stakeholders are people, groups, or institutions, which are likely to be affected by a
proposed project (either negatively or positively), or those which can affect the
outcome of the project.
Primary and Secondary
• Primary stakeholders are the stakeholders who are directly affected, either positively
or Stakeholders
negatively by the project
• The secondary stakeholders are stakeholders, which play some intermediary role
and may have an important effect on the project outcome (E.g. Government &
donors)
Target group(s)
• are those people or groups who will be immediately, positively affected by the project at the
purpose level.

Final beneficiaries
• are those who benefit from the project in the long term, at the level of sector or community
Project analysis and evaluation 05/27/2025
12 Examples: target groups and final beneficiaries

1. Your project builds toilets for 20 individual

households.
2. You give out sewing machines to 15 women
and train them in sewing.

Addis Ababa University School of Commerce

 13 1.5 Project Classification
Based on Ownership
• Private sector
• Public sector
• NGO’s

Based on the Sources of Finance

• Project with domestic financing
• Project with foreign financing
• Project with mixed financing
• Project with financial institutions

Based on the Forces Behind

• Demand driven/need driven
• Donor Driven
• Political Driven

Based on purpose
• New projects
• Expansion projects
• Updating projects Project analysis and evaluation 05/27/2025
 14 1.5 Project Classification
Based of Sector
• Industrial project
• Agricultural project
• Educational project
• Health project

Based on risk involved in the project

• High risks project
• Normal risks project
• Low risks project

Based on resources required by the projects

• Project with domestic resources

• Project with foreign resources

Based on speed required for execution of the project

• Normal project
• Crash project
• Disaster project Project analysis and evaluation 05/27/2025
 15 1.5 Project Classification

Based on time horizon

• Long term projects

• Medium term projects
• Short term projects

Based on locality

• Regional
• National
• International

Based on resource use

• Capital intensive projects

• Labor intensive projects
• Energy intensive projects

Project analysis and evaluation 05/27/2025

16 Exercise
How would you classify Addis Ababa Light Rail Transit project based
on the following aspects?
 Ownership ___________________________________________________
 Source of finance ___________________________________________________
 Forces behind ___________________________________________________
 Time horizon ___________________________________________________
 Locality ___________________________________________________
 Resource use ___________________________________________________
 Speed required for execution of the project
_______________________________
 Purpose ________________________________________________________________

Addis Ababa University School of Commerce

 1.6 National development planning & projects
17

Dev’t plan Dev’t Strategies Dev’t goal

Program 1 Program 2 Program 3

P P P
r r r
o o o
Pro Pro Pro Pro
j j j
ject ject ject ject
e e e
1 2 1 2
c c c
t t t
1 2 3

Project analysis and evaluation 05/27/2025

 18 1.6 Development planning & projects

Development Goal/ objectives

• statement of intention or aspiration of a government to improve the living
conditions of its people
• It is a comprehensive statement which guides development.
• For example, growth, equity in income distribution, reduction of unemployment.

Development Strategies
• the general methods of achieving specific objectives at national or organizational
levels.
• describes the essential resources which will be committed to achieve objectives &
how these resources will be organized. Example, it may ask how to organize the
labor force ofProject
theanalysis
organization
and evaluation or the project. 05/27/2025

• It can take different forms such as import substitution, export promotion, ALI etc,
 1.6 National development planning & projects
19

Plan
• a statement of anticipatory decisions, their interrelations and the criteria
employed in making them
• designed as a means to accomplish strategies
• A national plan covers an entire region, e.g a district or entire economy and it is
made up of proposed programs and projects to be implemented over a period of
time
Program
• A program is open ended in nature and could be on going investment activities
which are not time bound.
• A series of coordinated, related, multiple projects that continue over an extended
time and are intended to achieve a goal.

Project
• a discrete activity aimed at specific objective with a defined budget and limited
timeframe Project analysis and evaluation 05/27/2025

• Projects often constitute a clear and distinct element of a larger program.

20 1.6 National development planning & projects
Program Vs Project

Program Project
. Differences
Scope/Objectivities Wide/diverse Narrower/limited
Location diffused/wide Specific
Life time Non-time bound Time bound
Beneficiaries Not specific Specific
Resources Larger budget Limited budget
Example:
• Project: ????
• Program: HIV Prevention Program

. similarities
Project analysis and evaluation 05/27/2025
21 1.7 Project Management
Can you think of a definition of project
management?
 Project management is the practice of
initiating, planning, executing, controlling,
and closing the work of a team to achieve
specific goals and meet specific success
criteria at the specified time.
 Project management is the application of
knowledge, skills, tools and techniques to
project activities to meet project
requirements.
Project analysis and evaluation 05/27/2025
22 1.7 Project Management
Characteristics of project management
 A single designated person, namely the project manager,
is responsible for managing the project organization.
 The project manager acts (to some extent) independently
and outside the normal functional authority structure.
 The project manager is responsible for integrating
multidisciplinary group (different functional specialists)
into a multidisciplinary project team.
 Decision-making, accountability, outcomes and rewards
are shared among members of the project team and
supporting functional units
Project analysis and evaluation 05/27/2025
23 1.7 Project Management

Knowledge areas in project management

 Knowledge areas describe the key competencies that project
managers must develop.
 Four core knowledge areas lead to specific project
objectives (scope, time, cost, and quality).
 Five facilitating knowledge areas are the means through
which the project objectives are achieved (human
resources, communication, risk, procurement and
stakeholder management).
 One knowledge area (project integration management)
affects and is affected by all of the other knowledge areas.
 All knowledge areas are important!

Project analysis and evaluation 05/27/2025

 Suggested Skills for Project Managers
 Project managers need both “hard” and “soft”
skills.

 Hard skills include product knowledge and

knowing how to use various project
management tools and techniques.

 Soft skills include being able to work with

various types of people.

24
25 Suggested Skills for Project Managers
 Communication skills: Listens, persuades.
 Organizational skills: Plans, sets goals, analyzes.
 Team-building skills: Shows empathy, motivates,
promotes esprit de corps.
 Leadership skills: Sets examples, provides vision
(big picture), delegates, positive, energetic.
 Coping skills: Flexible, creative, patient, persistent.
 Technology skills: Experience, project knowledge.

Project analysis and evaluation 05/27/2025

26 Project management V Functional management

Project Manager Functional Manager

Must oversee many functional areas, In charge of one of the functional
each with its own specialist departments
Generalist/ facilitator Analyst/ Expert
He is required to be more skilled at He is more skilled at analysis. He is
synthesis. Must have the ability to put specialist in certain areas only.
many pieces of a task together to form a
coherent whole.

Uses a system approach. (focuses on Uses analytical approach. (breaking

interaction between parts of the system, no the system into smaller and smaller
detail analysis on individual parts) elements)
Only in project life duration Permanent work scenario

Project analysis and evaluation 05/27/2025

27 1.8 project Organization structure
 The traditional form of organization is not suitable
for project management.
 a project is a non-routine, non-repetitive undertaking
often plagued with many uncertainties
 the relationships in a project setting are dynamic,
temporary, and flexible
 a project requires a coordination of the efforts of
persons drawn from different functional areas and
contributions of external agencies
 Due to these reasons, project management calls
for a different form of organization
Project analysis and evaluation 05/27/2025
28 1.8 project Organization structure
 Depending on the authority that is given to
the person responsible for the project, the
project organization may take one of the
following three forms:
 Functional organization.
 Divisional/ project-based organization.
 Matrix organization.

Project analysis and evaluation 05/27/2025

 Functional Organization

29 Once the project begins operation, the various components

of the project are taken by the functional units, each unit is
responsible for its charged component.
 A person is appointed with the primary responsibility of
coordinating the work of the people in the functional
departments.
 Such a person, referred to commonly as the project coordinator,
acts essentially in a staff position to facilitate the coordination of
line management in functional departments (focal person) & has
no authority & responsibility for line management.

Project analysis and evaluation 05/27/2025

 Divisional/ project-based organization
30
 Involves creation of an independent project team
(independent division)
 The team’s management
 is separated from the parent organization’s other units,
 have their own technical staff and management,
 The enterprise assigns certain resources to project team,
and grant project manager of the largest free
implementation of the project

Project analysis and evaluation 05/27/2025

 Matrix Organization

31the personnel working on the project have a responsibility to

their functional superior as well to the project manager.
 the authority is shared between the project manager and the
functional managers.
 The project manager integrates the contributions of personnel in
various functional departments toward the realization of project
objectives.

Project analysis and evaluation 05/27/2025

32 Chapter2: Project Cycle
 Overview
 Baum Project Cycle
 UNIDO Project Cycle

Project analysis and evaluation 05/27/2025

33 2.1: Overview
• The sequence of phases through which the
project will evolve
• It is basically defined by its phases, according
to which a project swims through & finally
reaches to handover stage.
• The main features of this process are
information gathering, analysis and decision-
making.
• There are various models that deal with the
project cycle.
Addis Ababa University School of Commerce
 2.2 Baum Project Cycle
34
 The concept of the project cycle was first popularized by a World
Bank publication by Warren Baum in 1970 with four elements:
 Identification
 Preparation and analysis
 Appraisal
 Implementation
 Evaluation was added in a later version in 1978.

Five phases:
1) identification (finding the project)
2) preparation/analysis (Does it have merit?)
3) appraisal (critical review, independent)
4) implementation (getting it started)
5) evaluation (success or failure))
Project analysis and evaluation 05/27/2025
 Identification Phase
 Involves finding individual projects
 Sources:
 Resource based
 Market based
 Need based
 Technical specialists & local leaders
 Proposals to extend existing projects
 Bank reports
 Identification of potential stakeholders,
particularly primary stakeholders
 Carry out problem assessment and decide upon
key objectives
 Preparation/Analysis Phase
 The technical, commercial, institutional,
economic, environmental, and financial issues
facing the project are studied and addressed —
including whether there are alternative methods
for achieving the same objectives.
 Assessing feasibility as to whether and
determining whether to carry out more
advanced planning.
 Project plan is developed which can be
appraised.
 Appraisal Phase

 Critical review,  Aspects to be

independent covered:
evaluation  Technical

 re-examines every  Financial

 Commercial
aspect of the project
plan to assess its  Incentive

logic/value prior to  Economic

release of big  Managerial

money.  Organizational
 environmental
 may involve new
information
 Implementation Phase

 Objective of previous phases is to have a project

that can be implemented to the benefit of
recipients
 the better and more realistic the project plan,
the easier to implement & more likely it will be
successful or beneficial
 implementation needs to be flexible, though,
considering changes in prices and technology
 the greater the uncertainty or novelty of the
project, the more changes will occur.
 Problems in modifying the project
 Evaluation Phase
 This phase regards evaluation of success or failure
elements of a project with relevance to the future
 Compare the actual progress with the plan
 Are or have objectives being/been met? If not, were the
objectives realistic?
 Are the decisions or actions made/taken by the management
sound & responsible?
 usually takes place throughout the project, but
sometimes only at the end
 undertaken by management, sponsoring company/
agency, etc.
 some projects have separate internal units for this or
use outsiders
 Exercise: Indicate the stage (phase) at which the
40 following activities are performed?

 Potential resources will be explored and the machinery for

implementing the project will be identified.
 The social demand of the affected communities will be isolated
and be paid close attention.
 Target group, a tentative costing, time-table for activities, and
partners to be involved in the project will be identified
 It is a screening process which subjects all aspects of the
proposed project to scrutiny.
 It is a process of assessing and analyzing a project with a view
to identifying trouble spot or constraints.
 At this stage attempts will be made to translate the stated
objectives into practical realities by use of available resources.
Addis Ababa University School of Commerce
 2.3 UNIDO – Project Cycle
41
UNIDO has established a project cycle comprising three distinct phases.
 The pre – investment
 The investment
 The operational phases

I. The pre – investment phase comprises the following stages:

 opportunity studies
 Pre-feasibility study
 Support or functional studies
 feasibility study
 Project appraisal and investment decision

A. Opportunity Studies
 identification of investment opportunities
 It should analyze: Natural resources, the existing agriculture, Future demand for
consumer goods, Imports substitution and export possibilities, expansion, etc
 May be general or specific
Project analysis and evaluation 05/27/2025
42 2.3 UNIDO – Project Cycle
B. Pre – feasibility studies
preliminary selection and to see if
 All possible project alternatives are examined
 The project concept justifies detail study
 All aspects are critical and need in – depth investigation
 The project idea is viable and attractive or not
 Etc

C. Support (functional) studies

 cover aspects of an investment project, and are required as prerequisites for,
or in support of, pre – feasibility and feasibility studies, particularly large –
scale investment proposals.
 The contents of a support study vary, depending on its type and
nature of the projects.
Project analysis and evaluation 05/27/2025
43 2.3 UNIDO – Project Cycle
D. Feasibility Studies
 the detailed formulation of the project
 The commercial, technical, financial, economic and environment prerequisites
for an investment project are defined and critically examined on the basis of
alternative solutions already reviewed in the pre – feasibility study.
 should provide all data necessary for an investment decision.
 should be carried out only if the necessary financing facilities, as determined
by the studies, can be identified with a fair degree of accuracy.
E. Appraisal Report
 various parties will carry out their own critical review of the investment project
in accordance with their individual objectives and evaluation of expected risks,
costs and gain.

Project analysis and evaluation 05/27/2025

 Difference between feasibility study and Pre-feasibility
Study
44

 Objective
 Scope
 Type of Research
 Time Spent
 Cost Involvement
 Accuracy of Information Gathered

Addis Ababa University School of Commerce

45 2.3 UNIDO – Project Cycle
II. The investment/implementation Phase:
Can be divided into the following stages:
 Establishing the legal, financial and organizational basis
for the implementation of the project
 Technology acquisition and transfer
 Detailed engineering design and contracting
 Acquisition of land, construction work and installation
 Pre-production marketing
 Recruitment and training
 Plant commissioning and start up
Project analysis and evaluation 05/27/2025
46 2.3 UNIDO – Project Cycle
III. Operational phase:
Initial period after start-up (short-term view)
 Adaptation of production techniques
 Operational difficulties with equipment
 Low labor productivity
 Mostly originated from implementation phase

Full production (long-term view)

 Review of chosen strategies and related production and marketing
costs as well as sales revenues
 Remedial measure either difficult or expensive
 direct relationship with the projections made at the pre – investment phase

Project analysis and evaluation 05/27/2025

47 Chapter 3: Project Identification

 Overview of Project Identification

 Sources of Project ideas
 Project concept/profile
 Tools for Identifying Investment Opportunities
 Prioritization & Ranking
 Project Rating Index

Addis Ababa University School of Commerce

48
3.1 overview of Project Identification
Definition
 Project Identification is a repeatable process for
documenting, validating, ranking and approving
candidate projects.
 The project identification stage attempts to
answer the questions:-
 How do projects come about?
 Where do projects come from?
 Why are projects where they are?
 .
Project analysis and evaluation 05/27/2025
 3.2 SOURCES OF PROJECT IDEAS
 Analyze the Performance of Existing Industries-
profitability & capacity util.
 Examine the Inputs and Outputs of Various
Industries
 Review Imports and Exports
 Study Plan Outlays (for d/t sectors) and
Governmental Guidelines to industries
 3.2 SOURCES OF PROJECT IDEAS
 Look at the Suggestions of Financial
Institutions and Development Agencies
 Investigate Local Materials and Resources-
ways of adding value to them
 Analyze Economic and Social Trends
 Study New Technological Developments
 Draw Clues from Consumption Abroad
 3.2 SOURCES OF PROJECT IDEAS
 Explore the Possibilities of Reviving Sick
Units
 Identify Unfulfilled Psychological Needs
 Attend Trade Fairs
 Stimulate Creativity for Generating New
Product Ideas – modification,
rearrangement, magnification, reduction,
combination, etc
52 3.3 Tools for Identifying Investment Opportunities

 There are several tools or frameworks that are

helpful in identifying promising investment
opportunities. The more popular ones are:
 Porter model
 Life cycle approach

Project analysis and evaluation 05/27/2025

53 3.3 Tools for Identifying Investment Opportunities

Porter Model
 According to Michael Porter the profit potential of an industry
depends on the combined strength of the five basic competitive
forces.
Forces Driving Industry Competition
 Threat of New Entrants
 Rivalry Among Existing Firms
 Threat of Substitute Products
 Bargaining Power of Buyers
 Bargaining Power of Suppliers
Project analysis and evaluation 05/27/2025
 3.3 Tools for Identifying Investment Opportunities
54

Life Cycle Approach

 Many industrial economists believe that most
products evolve through a life cycle that has four
stages:
 Pioneering stage
 Rapid growth stage
 Maturity and stabilization stage
 Decline stage
 Investment in the pioneering stage, may have a low return and
negative NPV. However, it may create options for participating in
growth.
Project analysis and evaluation 05/27/2025
55 3.5 PRIORITIZATION & RANKING
 Apply when there are two or more projects.
 We divide the prioritization process into the
following key steps:
i. Collection – you must collect and gather all
the data about your projects.
ii. Ranking – you must develop and use a
ranking model that includes criteria for
prioritizing.
iii. Verification – you must approve the ranked
projects.
Addis Ababa University School of Commerce
 Factors to be considered
Compatibility with the Promoter
 It Fits the Personality of the Entrepreneur
 It is Accessible to Him
 It offers him the Prospect of Rapid Growth
and High Return on the Invested Capital
 Factors to be considered
Consistency with the Government Priorities
 Is the Project Consistent with the National Goals
and Priorities?
 Are there any Environmental Effects Contrary to
Governmental Regulations?
 Can Foreign Exchange Requirements of the
Project be Easily Accommodated?
 Will there be Any Difficulty in Obtaining the
License of the Project?
 Factors to be considered
Availability of Inputs
 Are the Capital Requirements of the Project within
Manageable Limits?
 Can Technical Know-How Required for the Project be
Obtained?
 Are the Raw Material Required for the Project Available
Domestically at a Reasonable Cost? If the Raw Materials
Have to Be Imported, Will there be Problems?
 Is the Power Supply for the Project Reasonably Obtainable
from different sources
 Factors to be considered
 Adequacy of Market- size of market must fit
prospect of adequate sales volume. Factors are:
 Total Present Domestic Market
 Competitors and Their Market Share
 Export Markets
 Sales and Distribution System
 Projected Increase in Consumption
 Barriers to the Entry of New Units
 Economic, Social and Demographic Trends
 Patent Protection
 Factors to be considered
 Reasonableness of Cost – cost structure enables
to realize acceptable profit with a price
 Cost of Material Inputs
 Labour Costs
 Factory Overheads
 General Administrative Expenses
 Selling and Distribution Cost
 Service Cost
 Economies of Scale
 Factors to be considered
Acceptability of Risk Level – risk charactering
the project. Factors to consider:
 Technological Changes
 Competition from Substitutes
 Competition from Imports
 Governmental Control Over Price and
Distribution
62 3.6 PROJECT RATING INDEX
The steps involved in determining the project
rating index are as follows:
 Identify factors relevant for project rating
 Assign weights to these factors ( the weights are supposed to
reflect their relative importance)
 Rate the project proposal on various factors, using a suitable
rating scale (Typically a 5-point scale or a 7-point scale is used
for this purpose.)
 For each factor, multiply the factor rating with the factor
weight to get the factor score
 Add all the factor scores to get the overall project rating index

Project analysis and evaluation 05/27/2025

 3.6 PROJECT RATING INDEX
Factor Rating Factor
Factor Weight
VG G A P VP
score
5 4 3 2 1

Input availability 0.25 ü

0.75
Technical know-how 0.10 ü 0.40
Reasonableness of cost 0.05 ü 0.20
Adequacy of market 0.15 ü
0.75
Complementary relationship
with other products 0.05 ü
0.20
Stability 0.10 ü
0.40
Dependence on firm’s
strength 0.20 ü
1.00
Consistency with
governmental priorities 0.10 ü 0.30

Rating Index
4.00
64 3.6 Project concept/profile
 A project concept note is a summary of a proposal
containing a brief description of the idea of the
project and the objectives to be pursued.
 In some financing programs, funding agencies
require a concept note before the submission of a
full proposal, in order to decide whether the
proposed project is in line with the priorities of the
program and to eliminate proposals that are not
likely to be funded.
 A concept note is a brief outline of the proposed
project Project analysis and evaluation 05/27/2025
65 3.6 Project concept/profile
Contents of concept note:
1. Title: it should be snappy, informative, and distinctive.
2. Background: it may be composed of following two guiding
questions: Why it is crucial to address the problem identified?
What has already been done to solve the problem?
3. Objectives: they should relate to the more general objectives as
previously agreed and entered into the action plan.
4. Outputs: They are tangible items, such as a newly constructed
technical facility, the publication of information materials, or
events, such as workshops or stakeholder meetings
5. Activities and duration: a summary of the planned activities to
achieve the project objectives.
Project analysis and evaluation 05/27/2025
66
3.6 Project concept/profile
Contents of concept note:
6. Beneficiaries and impacts: The expected benefits, both in
quantitative and qualitative terms, and when and where they
will occur; Specific group of beneficiaries; Considerations
concerning how and by whom the impacts will be assessed.
7. Project management (includes monitoring & evaluation): this
section should explain how the objectives will be achieved and
how the project will be managed and evaluated.
8. Budget (only if requested by the donor agency): before drawing
up the budget, it is necessary to get an overview of the inputs
needed to achieve the objectives. These may be, for example:
people, travel costs, vehicles, equipment, supplies, services,
works, facilities and overheads.
Project analysis and evaluation 05/27/2025
 Chapter 4
Technical Analysis
67

Project A & E 05/27/2025

 4.1 Overview of Feasibility study
68
 Feasibility study is an analysis of the ability to complete a project
successfully, taking into account legal, economic, technological,
scheduling and other factors..
 It allows project managers to investigate the possible negative and
positive outcomes of a project before investing too much time and
money.
 For example, if a private school wanted to expand its campus to
alleviate overcrowding, it could conduct a feasibility study to
determine whether to follow through. This study might look at
 where additions would be built
 how much the expansion would cost
 how students &students' parents feel about the proposed expansion
 what local laws might affect the expansion
 what financing might be used

 Business plan Vs Feasibility study

project analysis & evaluation 05/27/2025
69 4.1 Overview of Feasibility study

Reasons to Do a Feasibility Study

 Gives focus to the project and outline alternatives by
narrowing them
 Surfaces new opportunities through the investigative
process
 Identifies reasons not to proceed
 Enhances the probability of success
 Provides quality information for decision making
 Helps to increase investment in the company
 Helps in securing funding from the sources
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70 4.1 Overview of Feasibility study
Reasons given not to do a Feasibility Study
 We know that it is feasible as an existing business is
already doing it
 Why do we do another feasibility study when one was
done just a few years ago?
 Feasibility studies are just a way for consultants to
make money
 The market analysis has already been done by the
business that is going to sell us the equipment
 Feasibility studies are a waste of time

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71
4.2 Market & Demand Analysis
Key Terms
 A market is any place where the sellers can
meet with the buyers where there is a
potential for a transaction to take place.
 Marketing is a business activity of presenting
products or services to potential customers in
such a way as to make them eager to buy
 Market analysis is a process of assessing the
level of demand for the product or service to
be produced by the project.
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 4.2.1 Role of Market and Demand Analysis
72

Market analysis usually ranks top in the

sequence of the core chapters of a feasibility
study.
 Analysts who have to calculate the socio – economic costs and
benefits of a project, can only start their job, if market analyst
delivers sales forecast and market strategy.
 market analysis is obviously more ambitious and risky in
comparison to the other parts of a feasibility study, as it has to
fight with the future.
 The marketing demand and sales forecast is necessarily
subjective and vague, since, in the final end it has to deal with
the behavior of human beings
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73

4.2.2 Steps In market

and Demand Analysis

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 74 Collection of Demand
Secondary Forecasting
Information

Situational
Characterization
Analysis and
of the Market
Specifications
of Objectives

Conduct of Market
Market Survey Planning
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75 1SITUATIONAL ANALYSIS AND SPECIFICATIONS OF
OBJECTIVES

 An informal survey of what information is available in

the area
 The analyst may informally talk to the customers,
competitors, middlemen, and others in the industry
 To learn about:
◦ the preferences and purchasing power of customers
◦ actions and strategies of competitors
◦ practices of the middlemen.
 To carryout formal study after this stage, it is necessary to specify
objectives of market study at this stage.
◦ May be structured in the form of questions.
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 1SITUATIONAL ANALYSIS AND SPECIFICATIONS OF
OBJECTIVES
76

 The objectives of the market and demand analysis may be to answer the
following questions:
Who are the buyers of the product?
What is the total current demand for the product?
How is the demand distributed temporally & geographically?
What is the break-up of demand for products of different sizes?
What price will the customers be willing to pay for the improved
product?
How can potential customers be convinced about the superiority of the
new product?
What channels of distribution are most suited for the product?
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77 2 COLLECTION OF SECONDARY
INFORMATION
SECONDARY SOURCES OF DATA
1. Ethiopian Economic Survey
2. Census of Ethiopia
3. Reports of Export Working Groups on Various Industries
4. Census of Manufacturing Industries
5. Monthly Statistical Bulletin
6. Annual Survey of industries
7. Publications of Advertising Agencies

Evaluation of Secondary Information

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78 3 CONDUCT OF MARKET SURVEY

 Census Survey
 Sample Survey
 Steps in a Sample Survey
 Define the Target Population
 Select the Sample Size and Sampling Scheme
 Develop the Questionnaire
 Recruit and Train the Field Investigators
 Obtain Information as Per the Questionnaire from the
Sample of Respondents
 Scrutinize, analyze and interpret the Information
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79 4 CHARACTERISATION OF THE
MARKET
 Effective Demand in the Past and Present
Production + Imports – Exports – Change in stock
level
 Breakdown of Demand
 Nature of Product
 Consumer Groups
 Geographical Division

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80 4 CHARACTERISATION OF THE
MARKET
 Price
 Methods of Distribution and Promotion
 Consumers
 Supply and Competition
 Government Policy

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81 5 DEMAND FORECASTING

Two main types: qualitative and quantitative

I. Qualitative (Subjective) Methods
 These methods rely essentially on the judgment of
experts to translate qualitative information into
quantitative estimates
 Used to generate forecasts if historical data are not
available (e.g., introduction of new product)
 The important qualitative methods are:
 Jury of Executive opinion Method
 Opinions of Sales Representatives
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 Delphi Method
 5 DEMAND FORECASTING
82

A. JURY OF EXECUTIVE OPINION METHOD

 Involves small group of high-level experts and managers
 Pool opinions of these experts
 Group estimates demand by working together
 Combines managerial experience with statistical models

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83 5 DEMAND FORECASTING
A. JURY OF EXECUTIVE OPINION METHOD
 Main advantages
 Combine knowledge and expertise from various
functional areas
 People who have best information on future
developments generate the forecasts
 Main drawbacks
 Expensive
 No individual responsibility for forecast quality
 persons with strong personalities may exercise
disproportionate influence.
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84 5 DEMAND FORECASTING
B. Opinions of Sales Representatives
 Salesmen are required to make out an estimate of
sales in their respective territories for a given period.
 An advantage is salesmen are in close touch with the
consumers and possess good knowledge about the
future demand trend.
 A drawback is that salespeople may be overly
optimistic or pessimistic.
Further, they may be unaware of the broad economic
patterns that may affect demand

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85 5 DEMAND FORECASTING

C. DELPHI METHOD
 A form of expert opinion forecasting that
uses a series of written questions and
answers to obtain a consensus forecast.
 Experts do not meet to discuss and
agree on a forecast, eliminating the
potential pitfall resulting from using a
jury of executive opinion.

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 5 DEMAND FORECASTING
86

C. DELPHI METHOD
 Approach

Coordinator Each expert Coordinator

Sends Initial writes response performs
Questionnaire (anonymous) analysis

Coordinator No
Coordinator
sends updated Consensus Yes
summarizes
questionnaire reached? forecast

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87 5 DEMAND FORECASTING

C. DELPHI METHOD
 Main advantages
 Generate consensus
 Can forecast long-term trend without availability of
historical data
 Less expensive
 Main drawbacks
 Slow process
 Experts are not accountable for their responses
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88 5 DEMAND FORECASTING
II. Quantitative (Objective) methods
 Employ one or more mathematical models that rely
on historical data and/or causal/indicator variables to
forecast demand.
 Major methods include:
 time series projection methods
 causal models

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 5 DEMAND FORECASTING
89

i. TIME SERIES PROJECTION METHODS

 Set of evenly spaced numerical data
 Obtained by observing response variable at regular time periods
 Forecast based only on past values, no other variables important

Assumes that factors influencing past and present will continue
 The important time series projection methods are:
 Trend Projection Method
 Exponential Smoothing Method
 Moving Average Method

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 1. Trend Projections

Fitting a trend line to historical data points to project into the

medium to long-range
Linear trends can be found using the least squares technique

^
y = a + bx
^ where y = computed value of the variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the trend line
x = the independent variable (time variable)
Interpretation of Coefficients
 Slope (b)
 Estimated Y changes by b for each 1 unit increase in X

If b = 2, then sales (Y) is expected to increase by 2 for

each 1 unit increase in time (X)

 Y-intercept (a)
 Average value of Y when X = 0

If a = 4, then average sales (Y) is expected to be 4 at

time 0
 Least Squares Method

Actual observation Deviation7

Values of Dependent Variable

(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
(error) Deviation2
Trend line, y = a^+ bx

Time period
 Least Squares Method

Actual observation Deviation7

Values of Dependent Variable

(y value)

Deviation5 Deviation6

Deviation3
Least squares method minimizes the sum of
the squared errors (deviations)
Deviation4

Deviation1
Deviation2 ^
Trend line, y = a + bx

Time period Figure 4.4

 Least Squares Method

Equations to calculate the regression variables

^
y = a + bx

Sxy - nxy
b=
Sx2 - nx2

a = y - bx
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80 9 240
2013 4 90 16 360
2014 5 105 25 525
2015 6 142 36 852
2016 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x2 - nx2 140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 The
2 trend line
79 is 4 158
2012 3 80 9 240
2013 4 ^ 90 16 360
2014 5 y = 56.70
105 + 10.54x25 525
2015 6 142 36 852
2016 7 122 49 854
Sx = 28 Sy = 692 Sx2 = 140 Sxy = 3,063
x=4 y = 98.86

Sxy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
Sx2 - nx2 140 - (7)(42)

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example
160 –
150 –
140 –
Power demand

130 –
120 –
110 – Trend line,
y^ = 56.70 + 10.54x
100 –
90 –
80 –
70 –
60 –
50 –

Year
| | | | | | | | |
2010 2011 2012 2013 2014 2015 2016 2017 2018
98 2. Exponential Smoothing Method
 forecasted results are modified in light of observed errors in the
past
 Requires smoothing constant ()
 Ranges from 0 to 1

 Subjectively chosen

 Involves little record keeping of past data

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 Exponential Smoothing

t = Last period’s forecast

+ a (Last period’s actual demand
– Last period’s forecast)

Ft+1 = Ft + a(At - Ft )
where Ft+1 = new forecast
Ft = previous forecast
a = smoothing (or weighting)
constant (0 ≤ a ≤ 1)
 Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20
 Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

 Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
 3. Moving Average Method

 Forecasted sales for next period is the average of

sales of past periods
Simple Moving Average
 MA is a series of arithmetic means
 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over time

Simple Moving ∑ demand in previous n periods

average = n
 Simple Moving Average
Example
Actual 3-Month
Month Sales Moving Average

January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
 Weighted Moving Average

 Used when trend is present

 Older data usually less important
 Weights based on experience and intuition

∑ (weight for period n)

Weighted x (demand in period n)
moving average =
∑ weights
 Weights Applied Period
Weighted Moving Average
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Sales Moving Average

January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1/2
107
ii. Causal methods
 Causal methods seek to develop forecasts on the
basis of cause-effects relationships specified in
an explicit, quantitative manner.
 High-Low method
 Chain Ratio Method
 Consumption Level Method
 End Use Method
 Leading Indicator Method
 Regression analysis
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108
A. High-Low method
 it uses only the highest and lowest observation
values of the dependent and independent variables.
 The demand function is estimated by using these two

points to calculate the slope coefficient and the

constant or intercept.
 b = difference between the highest demand and lowest demand in the
past divided by the difference between the highest and the lowest of
the independent variable.
 a = Y-bX (take either highest or lowest observation values for X
and Y)

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109
A. High-Low method
 Illustration:
The following data were about sales of a certain product and no. of
households over the past five years. Use no. of households as
determinant for demand
Year No. of households Actual sales in thousands
2013 500 120
2014 450 110
2015 600 135
2016 660 140
2017 710 162

 b = 200; a = 20,000 ; dd function: Y = 20000 + 200X

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 B. CHAIN RATIO METHOD
110
 Forecast is made by applying a series of factors called
chain ratios
 E.g. A firm wants to estimate potential sales of an instant
coffee-TEMA.
Population next year= 120,000,000
Per capita demand of coffee = 2kg
Proportion of coffee used at home= 70%
Proportion of instant coffee= 40%
Estimated long run market share of TEMA= 20%
Average price per kg of instant coffee= Br100
What is potential sales for TEMA next year?

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111
C. CONSUMPTION LEVEL
 This method isMETHOD
used for those products that
are directly consumed. This method
measures the consumption level on the
basis of elasticity coefficients. The
important ones are
 Income elasticity of demand
 Price elasticity of demand

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112
C. CONSUMPTION LEVEL
METHOD
 Income Elasticity: This reflects the
responsiveness of demand to variations in
income. It is calculated as:
 E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1]
 Where: E1 = Income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
I1 = income level in the base year
I2 = income level in the following year
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113
C. CONSUMPTION LEVEL METHOD
 The aggregate demand is estimated using the following
formula:
Agg dd = Proj Popn (present per capita dd) ( 1+ (per capita change in income level x Ei))

Illustration:
 Q1=120; Q2=140; I1=1000; I2=1200
 Increase in per capita income level next year = 10%
 Present per capita demand for coffee = 3kgs
 Projected population next year = 120 million
Calculate the aggregate demand for coffee next year.
Soln
Ei = 0.85
Aggregate dd for coffee next year = 390.6 million
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114
D. END USE METHOD
 This method forecasts the demand based on the
consumption coefficient of the various uses of the product.
 Is mostly used for intermediate products

It involves the following steps:

 Identify the possible uses of the product
 define the consumption coefficient of the product for various uses
 project the output levels for the consuming industries
 derive the demand for the product

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115
D. END USE METHOD
 Illustration: Aloe Vera is used by four industries for producing different
products. The Consn Coeff., the projected output levels for these industries
and the projected dd for Aloe Vera for next year are shown below.

Projected Demand for Aloe Vera

Consumption Projected Output next Projected Demand for Aloe Vera
Coefficient year next year
Alpha 2.0 10,000 20,000
Beta 1.2 15,000 18,000
Kappa 0.8 20,000 16,000
Gamma 0.5 30,000 15,000
Total 69,000

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116
E. LEADING INDICATOR METHOD
 This method uses the changes in the
leading indicators to predict the changes
in the lagging variables.
 Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading
indicator(s) and the variable to forecast.

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 F. Regression Analysis

Used when changes in one or more independent variables can be

used to predict the changes in Sales

Most common technique is simple regression

analysis

We apply this technique just as we did in the trend

projection method example
 Simple Regression Analysis

Forecasting an outcome based on predictor variables using the

least squares technique

^
y = a + bx
^ where y = computed value of the variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to predict the value of the
dependent variable
 Simple Regression Analysis
Example
Sales Local Payroll
(Br millions), y (Br billions), x
2.0 1
3.0 3
2.5 4
2.0 2 4.0 –
2.0 1
3.0 –

Sales
3.5 7
2.0 –

1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Simple Regression Analysis Example

Sales in millions, y Payroll in bill, x x2 xy

2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5

b= ∑xy - nxy =
51.5 - (6)(3)(2.5) = 0.25
x = ∑x/6 = 18/6 = 3
∑x2 - nx2 80 - (6)(32)
y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75
 Simple Regression Analysis Example

^
y = 1.75 + 0.25x Sales = 1.75 + 0.25(payroll)

If payroll next year is estimated to

be Br6 billion, then: 4.0 –
3.25

Sales
3.0 –

Sales = 1.75 + .25(6) 2.0 –

Sales = Br3,250,000
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
 Multiple Regression Analysis

If more than one independent variable is to be used in the model,

linear regression can be extended to multiple regression to
accommodate several independent variables

^y = a + b x + b x …
1 1 2 2

Computationally, this is quite complex and generally

done on the computer
 Multiple Regression Analysis

In the previous example, assume including interest rates in the model gives the new equation:

^
y = 1.80 + 0.30x1 - 5.0x2
And if interest rate for the next year will be 12%, area payroll is Br6 billion

Sales = 1.80 + 0.30(6) - 5.0(0.12) = 3.00

Sales = Br3,000,000
124 UNCERTANITIES IN DEMAND FORECASTING
 Data about past and present markets.
 Lack of standardization
 Few observations
 Influence of abnormal factors
 Methods of forecasting
 Inability to handle unquantifiable factors
 Unrealistic assumptions
 Excessive data requirement

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125 UNCERTANITIES IN DEMAND FORECASTING

 Environmental changes
 Technological changes
 Shift in government policy
 Developments on the international scene
 Discovery of new source of raw material

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126 COPING WITH UNCERTAINTIES
 Conduct analysis with data based on uniform and
standard definitions.
 Ignore the abnormal or out-of-ordinary
observations.
 Critically evaluate the assumptions
 Adjust the projections.
 Monitor the environment.
 Consider likely alternative scenarios.
 Conduct sensitivity analysis
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127 6 Market Planning
 Marketing plan is product specific, market specific , or
company-wide plan that describes activities involved
in achieving specific marketing objectives within a set
time frame.

 A marketing plan shows the specifics of how you will

market or attempt to sell your product or service.

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128 6 Market Planning
It has the following key components
 1. Current marketing situation: market situation,
competitive situation, distribution situation, macro-
environment, etc.
 2. Opportunity and issue analysis: SWOT analysis
 3. Objectives: clear-cut, specific, and achievable.
 4. Marketing strategy: Target segment, positioning, product
line, price, distribution, sales force, promotion, etc.
 5. Action program: what will be done, when it will begin or be
completed, who will accomplish the tasks, what financial
resources are required, etc
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129 4.3 Production Program and Plant capacity

4.3.1 Production Program

 define the levels of output to be achieved during
specified period
 should indicate the basic products, by – products, and
wastes during the process.
 It should:
 be directly related to the specific sales forecasts.
 Consider losses of production within the production plant
site, in storage, transportation and by warranty service.
 Take into account level of technology absorption
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130 4.3.1 Production Program

The production program (capacity utilization) changes in time

during project life.
Initially (for the first one or two years of operation) small capacity
utilization is often achieved.
 market is not ready to acquire large amounts of new product
 the technological difficulties obstruct the full – capacity operation of the equipment.
 The determinants of a production program during the initial production
years vary considerably from project to project.
 Single – product – continuous process manufacture: production problems are more
critical
 Multiple – product – continuous process production: both production and sales
problems
 Batch/job order production: Sales problems are more critical
 Assembly/mass manufacture: sales problems in relation to price are critical

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131
4.3.2 Plant Capacity
 is the maximum output rate of a production or service
facility

Importance of Capacity Decisions

Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management

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132
4.3.2 Plant Capacity
Factors determining Capacity decision:
 Technological Requirement: Minimum Economic Size
determined by the technological factor.
Input Constraints: constraints on the availability of certain inputs.
Investment Cost: with no serious input constraint, cost per unit
of capacity decreases as the plant capacity increases.
Market Conditions:
 If very strong, higher capacity is preferable.
 If very uncertain, start with small capacity

Resources of the Firm: Managerial and financial

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133
4.3.2 Plant Capacity
Types of plant capacity:
1. Design capacity (Nominal Maximum Capacity)
 Maximum obtainable output under ideal conditions
 Can only be achieved with unusual working conditions.
 Example: A bakery can make 30 custom cakes per day when pushed at holiday
time

2. Effective capacity (Feasible Normal Capacity)

 Maximum output rate under normal (realistic) conditions
 The output to be achieved under efficient operating condition.
 Example: On the average this bakery can make 20 custom cakes per day

Actual output
 Rate of output actually achieved--cannot exceed effective capacity. This is effective
capacity minus unforeseen problems, such as machine breakdown, union problems,
and so on.
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134 4.3.2 Plant Capacity
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

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135
4.3.2 Plant Capacity
Example :
 SIF Bakery has a plant for processing breakfast rolls. The facility has an
efficiency of 90%, and the effective capacity is 80%. Three process lines are
used to produce the rolls. The lines will operate 7 days a week and three 8-
hour shifts per day. Each line is designed to process 120 standard rolls per
hour.
 Design capacity = 60,480 rolls per week
 Effective capacity = 48,384 rolls per week
 Anticipated production = 43,546 rolls per week

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136
4.3.2 Plant Capacity
Capacity and Scale
 Economies of scale: cost advantages exploited by expanding the
scale of production in the long run. Where the cost per unit of output drops
as volume of output increases
 Spread the fixed costs of buildings & equipment over multiple
units
 allow bulk purchasing & handling of material
 Finding process advantages
 Diseconomies of scale: rising long run average costs
 scheduling complexity
 Loss of focus
 Inefficiencies

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137
4.4 Raw material and Supplies
 study
Materials and supplies are the major inputs
(ingredients) of projects though the degree of
consumption may differ from project to project.
 closer relationship between the definition of input
requirements and other aspects of the project
formulation:
 definition of plant capacity
 location & site analysis
 selection of technology and equipment
 Economic & financial viability
 Etc

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138
4.4 Raw material and Supplies
The objective is study
 to identify and quantify the project material inputs
 to assess the feasibility of a sustained supply of these
inputs
 Basic issues to be raised:
 What types of materials are needed?
 Where are the sources of these materials?
 How are they obtained?
 What are the costs of these materials?
 What are environmental impacts of using these materials?
 etc

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 Classification of Raw Materials and Supplies

139

1. Unprocessed and semi-processed raw materials

Includes the following types of items:
i. Agricultural products: cereals, oil seeds, flowers, sugar canes and
sugar beets, etc
ii. Livestock and forest products: meat, milk, fur, leather/skin, horn,
teeth, etc of animals (both domestic and wild), timber, gums, etc.
iii. Marine products: fishes, the water itself, plants in the water , salt,
etc.
iv. Mineral products: both metallic (gold, phosphate, iron, etc) &
nonmetallic (oil, gas, coal, clay, etc)

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140 Classification of Raw Materials and Supplies

2. Processed industrial materials and components

Such inputs can be generally classified under:
i. Base metals: copper, aluminum, etc
ii. Semi processed materials: sheets, tubes, round bars, preform, etc
iii. Manufactured parts, components and sub-assemblies: electronic
equipments, seal frame, engine, etc

3. Auxiliary materials & factory supplies

Do not become integral part of finished product
 Chemical additives, packaging materials, containers, crates, paints,
varnishes, oils, grease, cleaning materials, etc
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 Classification of Raw Materials and Supplies
141
4. Utilities
 Electricity, water, fuel, steam, etc
 A detailed assessment of the utilities required can only be made after
analysis and selection of location, technology and plant capacity.

5. Spare parts
 Numerous small items & major components and parts of machinery or equipment.

6. Supplies for social and external needs

 not directly related to project operation
 E.g. for a project in a remote area:
 For employees & their families: food staffs, medicine, clothing, education materials
 For the local community: road & environmental cleaning materials

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142 Specification of Requirements
 In specifying the type, quality and quantity
materials required, the following factors are
considered:
 Technical factors- such as technology and production
process, type of machinery and equipment, production
capacity and program etc
 Commercial and financial factors- such as market demand
regarding products quality, competition for materials,
price of materials etc
 Socio-economic factors- such as skill of work force,
environmental policies and regulations, culture of the
people etc.
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 4.5 Locations, Site and Environmental
143 Assessment

 Location and site are often used synonymously but must be

distinguished.
 Location refers to a fairly broad area like a city, an
industrial zone or a coastal area.
 Site refers to a specific piece of land where the project
would be set up.
 The selections of location & site may be made separately or
together.

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144 Location Analysis
 Location choice is made from a wide geographic area within which
several alternative sites may have to be considered.
 Qualitative as well as quantitative considerations are to be taken
into account
 Factors determining choice of location:
 Proximity to R.M. & market
 Infrastructures
 Government policies
 Environmental impact
 Labor situation
 Climatic conditions & ecological requirements
 General living condition

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145
Factors determining choice of
location
1. Proximity to R.M. & Market
 The optimal location is the one with
minimum total costs of products sold

i) for resource-based projects: the one close to source of

R.M
ii) for a project based on imported R.M: the one close to
a port
Iii) for projects producing perishable & bulky
products: the one close to the center of consumption
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146
Factors determining choice of
2. Infrastructures: location
 Availability, cost, and reliability
 i)Technical Infrastructure: Water, electricity, insurance, banks, academic
institutions etc
 ii)Transport and Communication: Transport facilities such as by water, rail, air,
or road available for the inflow of various inputs and for the marketing of
products & good communication facilities including telex ,telephone, internet, etc

3. Government policies
 Identification of industrial zones
 Incentives to encourage investments
 Fiscal and legal regulations
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147
Factors determining choice of
location
4. Environmental impact
 Environmental impact assessment (EIA) is an assessment which aims at ensuring
that development projects are environmentally sound (friendly).
 To see the positive & negative impacts of the project
 i) Negative impacts
 Throwing gaseous emissions
 Disposal of wastes to river
 Causing noise, heat, etc
 May need to acquire environmental protection devices
 Government may impose high taxes
o ii) Positive impacts: additional benefits to the society
o Subsidies or prizes may be given by government

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148
Factors determining choice of
5. labor situation location
 The availability of skilled, semiskilled and unskilled labor
 Labor rates (past trends, current, and projected)
 Labor strikes (frequency and severity)
 Labor productivity

6. Climatic conditions and ecological requirements

i) Climatic Conditions: temperature, humidity, sun shine, rainfall, wind,
snow, dust, earthquake, etc
 There may be direct impact on the project costs of such factors as
dehumidification, air conditioning, refrigeration, or special drainage.
 Climatic conditions can also determine the success of a project in an
indirect way. E.g. Skilled labor force is reluctant to work in areas with
extreme climatic conditions.
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149
Factors determining choice of
 location
ii) ecological requirements
 Some projects may not have a negative environmental impact
themselves. But they may be sensitive to such effects.
 An agro industrial project clearly depends on the use of raw materials
that have not been degraded by contaminated water and soil.
 Management and labor may be reluctant to work in a factory located
in a polluted area with health risks.

7. General living conditions

 Cost of living
 Housing
 Facilities (education, recreation, transport, and Medicare, etc)

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150 Evaluating Location alternatives
 Factor rating
 Location CVP analysis: determine the location
that will have lowest total costs (or highest
profits)
 Center of gravity method: locating a
distribution center that minimizes distribution
costs or travel time to various destinations

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151 Factor Rating
General approach to evaluating locations that
includes both qualitative and quantitative inputs
Procedure:
1. Develop a list of relevant factors called critical success factors
2. Assign weights to each factor
3. Decide on common scale for all factors (0 to 100)
4. Score each location
5. Compute weighted score (wt x score) for each location
6. Sum up the weighted scores and get composite score
7. Select the location with highest composite score

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 Factor Rating
 BIKU
152 Supermarket is planning to open shopping center
outside Addis Ababa. It is considering two locations: Hawassa
and Adama towns.
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight Adama Hawassa Adama Hawassa
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5(.25)(60) = 15.0
Tourists visiting .05 6090 (.05)(60) = 3.0 (.05)(90) = 3.6
Land acquisition &
Construction costs .10 70 80 (.10)(70) = 7.0 (.10)(80) = 8.0
Proximity to inputs .28 80 70 (.28)(80) = 22.4(.28)(70) = 19.6
Community growth
potential .32 75 70 (.32)(75) = 24.0(.32)(70) = 22.4
Totals 1.00 73.9 68.6

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153 Choice of Site
 Once the location or alternative locations are
decided upon, a specific project site or alternative
sites should be defined
 Qualitative as well as quantitative considerations
are to be taken into account like that of location
selection.

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154
Factors determining choice of
1. Ecological conditions of sites site
 soil type, site hazards, history of natural calamities etc

2. Environmental impacts
 the nature of the project in relation to restrictions, standards and
guidelines of the government concerning noise, air pollution, effects
if it is close to residential areas etc.
3. Socio–economic conditions
 restrictions, incentives, requirements

4. Costs of land
 cost of land differs from site to site depending on of course its
proximity to main streets and other transport facilities, major
markets, customers etc
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155
Factors determining choice of
5.Infrastructure site
6. Site preparation and development costs
 some areas are more appropriate for construction without
much preparations and development efforts while other
areas may need several works to make them ready for use

7. Strategy of the projects such as future

expansion
8.Cost of utility lines extension

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156
Factors determining choice of
9. Number of sides of site
a land parcel
 A multi-sided parcel is more suitable for retail
 One-side parcel is more suitable for residential

10. Nature of goods (products) produced

(perishables or not)

11. Distance to seaport (import and export)

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157
4.6. Technology and
Engineering
4.6.1 Technology Analysis
 Technology = Technical process + Know-how
 Technical process = Hardware + software
 Know-how = Knowledge of how to use them
 Two or more technologies may be available
 Define technology required for a particular project through the evaluation of
all alternatives and selecting the most appropriate .

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158 Factors Determining Choice of
1. Plant capacity
Technology
 To meet a given capacity requirement, only a certain production
technology may be available.

2. Principal inputs
3. Investment outlay and production cost
 Over period of time & per unit of production

4. Product mix
 That results in a wider product mix including saleable byproducts is
preferable

5. Latest developments
 Must be based on latest developments to minimize the likelihood of
obsolescence in the near future

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159 Factors Determining Choice of
Technology
6. Use by other units
 must be fully proven and utilized in the manufacturing by others

7. Ease of absorption
8. Labor condition
 In countries with a shortage of & expensive labor - capital intensive
 In countries with excessive & cheap labor - labor intensive

9. The Environmental impact

 Investments in environmental protection devices

10. Implication in terms of foreign participation

 Foreign: labor, raw materials, aid, etc
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160
Means of Technology
acquisition
1. Technology licensing
 Gives the licensee the right to use patented
technology and get related know – how on a mutually
agreed basis.
 Efforts should be made to acquire only the essential
components of the technology package offered by the
licenser
 May be appropriate when
 There is continuous technology improvement
 The firm uses only some elements of the technology
package
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161 Means of Technology acquisition

2. Purchase of Technology
 Obtain the full ownership of technology through outright purchase
 May be appropriate when
 There is no possibility of significant improvement in technology in the
foreseeable future
 There is hardly any need for technological support from the seller of
technology

3. Joint Venture Arrangement

 The supplier of technology may participate technically as well as
financially
 May be appropriate when
 Continuing technical assistance & supply of inputs from technology
supplier are necessary
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162 4.6.2. Machinery & equipment
Selection
 The selection of equipment and technology are
interdependent
 Technology choice & equipment selection may be
made together or independently
 Types of equipments are:
 Plant or process equipment
 Mechanical equipments
 Electrical equipments
 Instruments
 Control devices
 Internal transportation equipments
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163
Factors in selection of
 Plant capacity equipments
 Production technology
 Infrastructural constraints
 The length of time required for training
 Investment outlay required
 The availability of foreign exchange for imported equipments
 Maintenance requirements and the availability of maintenance
facilities
 Government polices such as import controls
 The degree of automation required
 The availability of spare parts
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 Factors in selection of suppliers of equipments
164

 The desired quality of machinery

 The level of technological sophistication
 The reputation of the suppliers
 The expected delivery schedules
 The preferred payment term
 The required performance guarantee.

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165 4.6.3. Structure and Civil Works
 may be divided into three categories:
1. Site preparation and development
 Grading & leveling of site
 Removal of existing structures
 Relocation of existing pipelines, cables, roads, power lines
 Draining & removal of standing water
 Extension of utility lines

2. buildings and structures

 Factory buildings
 Ancillary buildings (stores, laboratories, maintenance centers)
 Administrative buildings
 Staff welfare buildings (cafeteria, medical centers)
 Residential buildings

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166 4.6.3. Structure and Civil Works
3. out door works
 Supply & distribution of utilities
 Handling & treatment of wastes & emissions
 Transport & traffic arrangements
 Out door lighting
 Landscaping
 Enclosure & supervision (fencing, gates, doors, etc)

 The plans and estimates for civil engineering works should be

detailed for costs estimates and implementation scheduling.

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167 4.7. Human Resource and Organization

4.7.1 Plant Organization and Management

 Organization is the means by which the operational functions and
activities of the enterprise are structured and assigned to
organizational units, represented by managerial staff, supervisors and
work force, with the objective of coordinating and controlling the
performance of the enterprise and the achievement of its business
targets.
 Indicates the delegation of responsibilities
 Depends to large extent on the
 Size & type of the enterprise
 Strategies, policies & values of those in a position of power in the
organization

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168 Organizational Functions

 The building blocks of the company

 They may be grouped into organizational units in line with the specific
requirements of the individual company:
 General management of the enterprise
 Finance, financial control and accounting
 Personnel administration
 Marketing, sales and distribution
 Supplies, transport, storage
 Production
 Main plant
 Service plants
 Quality assurance
 Maintenance and repair

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169 Organizational Structure

 Reveals vertical operational responsibilities & horizontal linkages &

represented by organizational chart.
 The structure of an organization will determine the modes in which it
operates and performs.
 The most common version is the pyramid shape, with three
organizational level
 Top management
 Middle management
 Supervisory management

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170 Organizational Design

 Organization Design is a formal, guided process for integrating

the people, information and technology of an organization.
 The design of the organization usually include the following
steps:
 The goals and objective for the business are stated
 The functions that are necessary to achieve the goals are defined
 The necessary functions are grouped or related
 The organizational framework or structure is designed
 All key jobs are analyzed, designed and described
 A recruiting and training program is prepared

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171 4.7.2. Overhead Cost

 Overhead cost could be grouped as follows:

 Factory Overheads
 Wages and salaries of indirect factory workers
 Factory supplies
 Maintenance
 Administrative overheads
 Wages and salaries of administrative workers
 Office supplies & utilities
 Rents & insurance
 Marketing Overheads
 Indirect marketing costs (Wages and salaries of sales persons, advertising, training etc.)
 Depreciation Costs
 Financial Costs

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172
4.7.3. Human Resources

Issues:
 Define the human resource requirements at various
levels and during different stages of the project.
 Determine the availability and costs of HR
 Analyze the training needs & costs related to
training
 Prepare recruitment plan & training program

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173
4.7.3. Human Resources
 The determination of human resources required is an
important part of a feasibility study
 People determine the success and failure of organizations
and projects
 Bad management or inadequate skills and experience of personnel
in key positions can easily jeopardize a promising and carefully
planned project.
 A project with great risk and uncertainties may on the other hand
prove to be successful due to good management and qualified
labour.

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174 Socio – economic and Cultural Environment

 Social and socio – economic conditions in the country and

location of the project must be determined in addition to
techno – economic and financial or commercial factor.
 Legislation and Labor Terms: Labor terms can be regulated
by
 Legislation
 trade union contracts
 common practice

 Labor Norms: The definition of human resources requirement should

be estimated on the basis of experiences of and comparisons with
similar projects in the project country and region.
 Occupational Safety, Health Care and Social Security
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175 Recruitment Plan

 Factors to be considered in preparing recruitment plan:

 The general availability of relevant human resource categories in
the project region and country
 The supply and demand situation in the project region (Human
Resource)
 Recruitment policy and methods
 Training policy and program
 probable terms of employment, including the wages and salaries
offered
 possible fringe benefits to employees and their families

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176 Training Plan
 Lack of experienced and skilled personnel can constitute a significant
bottleneck for project implementation and operation in developing
countries.
 Extensive training program should be designed and carried out as part of
implementation process of investment projects.
 Training may be planned
 at the plant site
 at the plant of joint venture partners or suppliers of technologies and equipment
 in similar factories in the country or abroad
 at specialized training institutes.
 Training can be provided at the factory by
 managerial and technical personnel
 specially recruited experts
 expatriate personnel

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177 Cost Estimates

 The manning tables prepared for each department can be used

for estimating labor costs
 distinction should be made between variable and fixed costs.
 When estimating the total wage and salary costs, provision should be
made for the following personnel overhead costs.
 Social security, fringe benefits and welfare costs
 Annual deposits to pension funds
 Direct and indirect costs of training
 Payroll taxes
 Installation grants, subsistence payments

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