Unit-2


Unit-2 Project formulation


1)  SIGNIFICANCE OF PROJECT FORMULATION
1.   Selection of Appropriate Technology-
       The first problem faced by entrepreneur is in the matter of selection of appropriate technology for his enterprise. Modern technology developed in the highly advanced countries may not be suitable for adoption in the developing countries, as the conditions prevailing differ from country to country.
2.   Absence of External Economies-
        The second problem relates the absence or non-availability of external economies. A project has to depend on other industries for the supply of raw materials, power, tools, spare parts etc. or an ancillary enterprises which can provide technical , financial & managerial services or on a complex network of transport & communication facilities or on an intricate system of business practices.
3.   Dearth of Technically Qualified Personnel-
           The third problem is the non-availability of technically qualified & appropriate personnel. Modern technology calls for a certain minimum supply of various skills that are generally lacking in developing countries.
4.   Resource Mobilization-
            The fourth problem is resource mobilization. In the context of present day development of the magnitude & the size of the project, it would be very difficult for an entrepreneur to provide the entire development capital that a project may need.
5.   Knowledge about Government Regulations-
             The government from time to time formulates its own policies regarding industry, import, export, taxation, price control etc. The entrepreneur must have a thorough knowledge about government regulations, policies & licensing procedures etc.
             These problems make the entrepreneur to undergo a lot of harassment & disappointment. But a project formulation, at the right time minimizes the severity & the magnitude of the above problems.

2) PROJECT  FORMULATION
(i) Technical:
a. Whether the technology involved in the project is appropriate to meet the      objectives, to ensure that
b. It is not an obsolete technology;
c. The technical collaborator is capable to impart such technology often assured by a term of buy-back of part of the production;
d. The other terms for the know-how are reasonable and acceptable as per norms.
(ii) Economical:
a. The investment for the project is justified considering the overall economical situation and, in particular, relevant to the industry for which the project is being planned.
b. The project cost is justified as against the economic benefit to be derived from it.
(iii) Financial:
a. The necessary resources will be available in time during the implementation of the project and its subsequent operation. Experience indicates that many projects, after being partially carried out, are stopped (particularly in the public sector) due to lack of funds leading to delay in its implementation and cost escalation.
b. The estimated revenue to be generated from the project after being implemented is sufficient to justify the project capital cost.
 (iv) Social:
a. The objective of the project is to serve common people through rural development, education, health-care etc. It should be ensured that sufficient funds are available to maintain such project e.g. a hospital built-up and equipped with necessary machineries/apparatus could not be run in the absence of funds to pay the doctors, nurses/maintenance staff etc.

3)  Feasibility Studies

       Feasibility studies allow companies to determine and organize all the details to make a business work. A feasibility study helps identify logistical problems, and nearly all business-related problems and their solutions. Feasibility studies can also lead to the development of marketing strategies that convince investors or a bank that investing in the business is a wise choice.
A. Description: A layout of the business, the products and services it will offer, and how it will deliver them.
B. Market feasibility: Description of the industry, the current and future market potential, competition, sales estimations and prospective buyers.
C. Technical feasibility: The details on how a company will deliver goods or services, including transportation, business location, technology needed, materials and labor.
D. Financial feasibility: A projection of the amount of funding or startup capital needed, what sources of capital a business can and will use, and what is the return on investment.
E.  Organizational feasibility: A definition of the corporate and legal structure of the business. This may include information about the founders, their professional background and the skills they possess necessary to get the company off the ground and keep it operational.
4)  FINANCIAL ANALYSIS
Financial analysis is the examination of financial information to reach business decisions. This analysis typically results in the reallocation of resources to or from a business or a specific internal operation. This type of analysis applies particularly well to the following situations:
·       Investment decisions by external investor.
·       Investment decisions by internal investor.
The key source of information for financial analysis is the financial statements of a business. The financial analyst uses these documents to derive ratios, create trend lines, and conduct comparisons against similar information for comparable firms.
The outcome of financial analysis may be any of these decisions:
·       Whether to invest in a business, and at what price per share.
·       Whether to lend money to a business, and if so, what terms to offer.
·       Whether to invest internally in an asset or working capital, and how to finance the acquisition.
Financial analysis is one of the key tools needed by the managers of a business to examine how their organization is performing. For this reason, they are constantly querying the financial analyst about the profitability, cash flows, and other financial aspects of their business.


                 FUNDAMENTAL ANALYSIS

5)  TECHNICAL ANALYSIS
        Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysts, who attempt to evaluate a security's intrinsic value, technical analysts focus on patterns of price movements, trading signals and various other analytical charting tools to evaluate a security's strength or weakness.
Technical analysis can be used on any security with historical trading data. This includes as follows:
Stocks


  • 1    futures
  • 2.       commodities
  • 3.      fixed-income
  • 4.      currencies
  • 5.      other securities
In general, technical analysts look at the following broad types of indicators:
  • price trends
  • chart patterns
  • volume and momentum indicators
  • oscillators
  • moving averages
  • support and resistance levels

6)  COST OF PROJECT
     The project cost is a cost required to procure all the needed products, services and resources to deliver the project successfully.
Example: In an example of a construction project, the cost estimation starts from land acquisition cost, construction cost, materials cost, administration cost, labor cost and other direct and indirect costs.
Now you have an understanding of what is project cost. Next, let’s look at why it is important.
Types of Project Costs.
There are 5 types of project costs incurred in any project. They are
·         Fixed Cost
·         Variable Cost
·         Direct Cost
·         Indirect Cost
·         Sunk Cost
a)  Fixed Cost:
       Any Cost which is fixed throughout the project life cycle and would not change by quantity, time or any other project factors called for a fixed cost.
Fixed cost Example: In a software project, rent for the company space, systems cost, software license cost, salaries are considered as a fixed cost.
“In short term, the costs are fixed, however, the costs are variable in the long term”
b)  Variable Cost:
On the contrary to fixed cost, the Variable cost is a cost which varies or changes in proportion to product or service that the project produces.
Variable Cost Example 1: Let’s understand it with a simple example. Imagine you are running a pizza shop.  Once you make, boxed and delivered the pizza to the customer, you have encountered several variable costs.  Which are (prices mentioned below are just for the sake of illustration), 
  • Pizza base: 50cents
  • Pizza sauce: 10cents 
  • Pizza seasoning: 10cents
  • Pizza topping (any): $1
  • Box to deliver:50cents
c)   Direct Costs:
Costs which are directly visible and accountable to produce the project output are called direct costs.
Direct Cost Example: Materials which are used to produce a product can be considered as the direct cost. Logistics, Human Resources, project development cost used specifically to the project can also be considered as a direct cost.
d)  Indirect Costs:
Costs which do not directly contribute or specific to the output of the project are called indirect costs. It may be either variable or fixed.
Indirect Cost Example: Overhead Cost, Electricity consumption, rent, salary, administrative, security cost. These costs are not directly related to the production. A project manager is considered as an overhead cost or indirect cost as he is not directly involved in the production whereas developer of a project will be considered as a direct cost.
e)   Sunk Costs:
Sunk Costs are costs which are already spent, but failed to incur any business value and cannot be recovered and permanently lost.
f)     Total Project Cost:
Calculating Total Project Cost (TPC) is a vital step for any project. TPC should include all the costs (fixed and variable) of the project.  The calculation should include total estimated cost (TEC) and other project costs (OPC). I.e., it includes but not limited to activities Costs such as pre-planning, feasibility, operating cost, commissioning, risk analysis, contingency, design, development, maintenance etc. 

7)  financing and estimates of sales of project:
A. Cost of Production
Cost of production refers to all costs involved in acquiring goods and services required as input for producing a product. The four major components of cost of production are –
*              a)                Material cost – It includes cost of raw material, chemicals, components, and other inputs required for production.
b)              Labour Cost --It includes cost of all manpower employed . It is a function of number of employees and rate of remuneration
c)               Cost of Utilities --It includes Cost of Power, Water and Fuel. The requirements for fuel, water and power are determined on the basis of norms specified by collaborators, consultants etc
Factory Overhead Cost – It includes expenses on repairs and maintenance, rent, taxes, insurance on factory assets. It is low in initial years high in later years
B. Estimates of sales and production 
In order to determine profitability of a project the first task to be carried out is the forecast of sales revenue. While estimating sales revenue the following things must be kept in mind –
(i)             It is not advisable to assume a high capacity utilization of machinery level in the first year of operation even if the technology is simple and company does not face any technical problems.
(ii)         It is not necessary to make adjustments for stock of finished goods. It may be assumed that production will be equal to sale.
(iii)      The Selling Price used may be the present selling price. It is assumed that change in selling price will be matched by change in cost of production.
In order to make estimates of Sales and Production the following details must be furnished for each product and until the maximum capacity utilization of the plant –
1. Installed Capacity
2. Number of working days
3. Number of shifts
 4. Estimated production per day
5. Estimated annual production
6. Estimated output as a percentage of plant capacity