• Material Inputs and Utilities
• Manufacturing Process/Technology
• Product Mix
• Plant Capacity
• Location and Site Development
• Machineries and equipment
• Structures and Civil works
• Projects Charts and Layouts

Technical Analysis of a Project

(1) Material input & utilities – It involves defining the requirements for materials and utilities, specifying their properties and setting up a supply channel. Material input & utilities may be classified into the following:

Raw materials – Agricultural products, Mineral Products, Livestock, Forest Products, Marine Products

Processed Industrial Materials/Components – Base metals, semi-processed materials, manufactured parts, small component

Auxiliary materials and factory supplies – chemicals, additives, packaging material, paint, oil, grease, cleaning materials

Utilities – power, water, steam, fuel

The following must be kept in mind while taking decisions regarding material, inputs and utilities:

• Physical properties of the material
• Transportation, Handling and Storage costs
• Quantity available from Domestic/Foreign sources
• Past and future trends in prices

(2) Manufacturing process/Technology – Taking a decision on manufacturing process and technology to be used is one of the most important decisions in technical analysis of a project.There are various options and alternatives available for manufacturing a product or service. It is the task of the project manager to select that process or technology that is easy to acquire, appropriate for the project and feasible with budget and technical requirements of the proposed project.

The choice of technology is influenced by the following considerations:

• Plant Capacity
• Material Inputs
• Production cost
• Product mix
• Technological Obsolescence
• Ease of adoption

(3) Product Mix – An important aspect in technical analysis of a project is product mix decision. It is essential to choose an effective product mix as different customers have different taste, preferences and needs. The choice of product mix is usually guided by market requirements. A project manager must keep in mind the quality of products and flexibility in production while taking product mix decisions.

(4) Plant capacity – It refers to the volume or no. of units that can be manufactured during given time period. It is also known as production capacity. It is the task of the project manager to determine the feasible normal capacity and nominal maximum capacity for the project.

Feasible Normal Capacity – It refers to the capacity attainable under normal working condition. It is computed keeping in mind the following factors:

• Installed capacity (machinery and equipment)
• Technical conditions of the plan
• Normal stoppages
• Holidays, shift patterns
• Downtime for maintenance etc.

The feasible normal capacity is the actual production capacity of a plant and usually depends upon the following factors:

• Technical Requirements
• Input Constraints
• Cost of Investment
• Market Conditions
• Resources of the company
• Government policy

Nominal Maximum Capacity – It refers to capacity that is technically obtainable through use of machines. It is usually the capacity guaranteed by the supplier of machinery.

(5) Location & Site – Location refers to a broad area within the city and while site means a specific piece of land where project would be set-up. For the purpose of site selection a critical assessment of the demand, size of plant and input requirements is conducted which involves examining the following factors:

• Proximity of Land to Markets
• Availability of raw materials
• Availability of Labour
• Existing Infrastructure i.e. roads, electricity, power, water supply
• Cost of land
• Government Policies

Miscellaneous other factors like 

• Climatic conditions
• General living conditions
• Proximity to auxiliary inputs / units
• Ease of Waste disposal and dumping

(6) Machinery & Equipment – Machinery and Equipment requirement depends upon the production technology and plant capacity of the proposed project. While conducting a technical analysis of a project the following steps must be used to select machinery and equipment:

Steps to select machinery and equipment for a project-

• Estimate levels of production over time
• Define various machining and operations
• Calculate machine hours required for each type of operations
• Select equipment and machinery for each function

Types of Machinery and equipment –

• Plant equipment (process)
• Mechanical equipment
• Electrical equipment
• Instruments
• Controls and Internal Transportation System
• Spare parts and Tools – required with the original equipment and for operational wear and tear.

Things to be considered while selecting machinery and equipment:

• Availability of power to run machines
• Transporting heavy equipment
• Ease of use
• Import Policies of Government if the machines are to be imported from a foreign country

Machinery may be procured in two ways either by placing different orders to different suppliers or through a turn-key contract

Factors affecting procurement of Machinery→

• Quality of machinery
• Level of technical sophistication
• Reputation of supplier
• Expected delivery schedule
• Payment terms
• Performance guarantees

(7) Structure and Civil Works – Technical analysis of a project for buildings, structures and civil works involves preparation and development of site which includes:

• grading and leveling of land
• demolition of existing structures
• relocation of pipeline, cables, roads
• reclamation of sewers and drainage
• connections for utilities
• arranging for electricity, water etc.

Buildings & structures – It involves construction of

• factory buildings
• ancillary buildings
• administrative area
• residential quarters
• non factory buildings – cafe, medical center

Outdoor works – It involves

• supply & distribution of utilities
• handling and treatment of emission, wastes, effluents
• outdoor lighting
• transportation
• landscaping
• enclosure and supervision – boundary, fence, barriers, gates, doors, security posts

Environment Aspect –

• The project must comply with all environmental rules and regulations
• All affluent must be disposed-off properly
• Eco-friendly standards must be adopted in the production process

(8) Projects Charts & Layout – Once the project manager has sufficient data related to market size, plant capacity, production technology, machinery and equipment, buildings etc. he prepares charts and layouts for the proposed project. Project charts and layouts help to:

• Define the scope of the project
• Provide basis for detailed project engineering
• Help is estimating investment and production cost

Types of Layout:

• General Function Layout
• Materials Flow Diagram
• Production Line Diagram
• Transport Layout
• Utility consumption layout
• Organizational Layout

Plant Layout – It is concerned with the physical layout of the factory. Plant layout is depends upon the production process adopted for the project, it involves the following considerations:

• Consistency of layout with production process and technology
• Smooth flow of goods from 1 stage to another
• Proper utilization of space
• Scope for further expansion
• Minimization of production cost
• Safety of personnel

After conducting a technical analysis, a project implementation schedule is prepared which reflects the plan of action regarding installation of machinery and operation of plant.

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The working capital requirements of a project consists of –

• Raw materials and Components
• Stock of Work in Progress
• Stock of Finished Goods
• Debtors
• Operating Expenses

Sources of Working Capital Finance for a project  –

• Working capital Advances provided by commercial Banks
• Trade Credit
• Accruals and Provisions
• Long term sources of Finance

Limitations of Obtaining Working Capital Finance –

The maximum permitted bank finance is computed on the basis of norms laid down by the Tandon Committee in its Lending Norms.

A firm has to also provide certain margin money against its current assets in order to obtain working capital finance.

Maximum permissible bank finance can be computed by the following –

The margin requirements vary with the type of current asset –

• The margin money for Raw Material – 10% – 25% of cost of raw materials
• The margin money for Work In Progress – 20% – 40%
• The margin money for Finished Goods – 30% – 50%
• The margin money for Debtors – 30% – 50%

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A Project may be defined as “a system involving coordination of different departments throughout the organization which must be completed within prescribed schedule and budget constraints.”

A Project is essentially an organized unit dedicated towards achieving predetermined objectives related to development of a certain asset, in a systematic manner with limited budget and time.

Types of Project

A Project can be classified on the basis of –

(1) Type of Activity 

• Industrial Project – Opening up of a factory, office, shop etc.
• Non – Industrial Project – Healthcare, educational, pollution control projects etc.

(2) Location of Project

• National Project – A project setup within the national boundaries of a country.
• International Project – A project setup or extending outside the domestic borders of a country.

(3) Time constraints

• Normal Project – Projects which do not have a strict timeline.
• Crash Project – Projects which have to be completed within a fixed time period.

(4) Ownership

• Private Sector Project – Projects setup by promoters and private investors with the objective of profit maximization.
• Public Sector Project – Project owned and controlled by the government of the country with the objective of development and welfare of the society.
• Joint Sector Project – Projects which are owned partly by the government and partly by private entrepreneurs.

(5) Size of Investment

• Small Project – Projects involving an investment of less than Rs. 1 crore.
• Medium Project – Projects involving an investment ranging between Rs. 1 crore to Rs. 100 crore.
• Large Project – Projects which involve an investment of more than Rs. 100 crore

(6) Needs and requirements

• New Project – A project with the objective of launching a new product or service in the market.
• Balancing Project – A project setup to meet the shortages in existing production unit
• Expansion Project – A project setup to increase the existing plant capacity
• Modernization Project – Projects which aim at updating the existing plant & machinery, infrastructure, technology etc.
• Replacement Project – Projects which are setup to replace an old plant or machinery
• Diversification Project – A project setup with the objective to introduce a new product line
• Backward Integration Project – These projects are setup by manufactures of a product. In such a project the manufacturer starts producing raw materials required for production himself.
• Forward Integration Project – These projects are setup by producers of raw materials. It involves value addition to the existing raw material in production to make a final product. Manufacturing facilities are added at the end of the product line to make a saleable product.

Project Life Cycle 

It refers to a logical sequence of activities conducted to accomplish project goals or objectives. For each stage in the project life cycle, accurate estimation of manpower, finance, material etc. is done by the project manager to ensure smooth-running of the project.

(a) Conception Stage – It includes generation of the project idea. An idea may come from employees, market source, consultant or entrepreneur.

(b) Project Initiation – It involves –

• Starting up of project development of a detailed project report
• Undertaking a feasibility study
• And Establishing a project team

(c) Project Planning – It involves preparation of plans and guidelines for project delivery.

(d) Project Execution – It involves the actual execution of the project i.e. building up of premises, manufacturing of product etc.

(e) Project Closure – When the project objectives are achieved the project is reviewed to know whether it has been completed within the given time constraint and budget limitations.

Project Management →

Project Management is an organization venture for managing projects which involves application of modern tools and techniques in planning, financing, implementing, monitoring, controlling and coordinating unique activities to produce desirable output according to the pre-determined objectives within the constraints of time and cost.

Project Management may be also defined as an capital expenditure that involves a current outlay of funds in expectation of streams of benefit in the future.

Steps in Project Management →

Project management involves six sequential steps which are to be followed for successful project implementation. They are:

Planning → Analysis → Selection → Financing → Implementation → Review

Planning – It involves generation of project idea and screening of project proposals. Feasibility studies are conducted to determine whether a project will be profitable or not.

Analysis – A detailed analysis of the selected projects is conducted and all relevant market, technical, financial and economic aspects are taken into consideration.

Economic Analysis – It is also called social-cost benefit analysis. It is conducted to determine the impact of the project on the society in terms of income distribution, level of savings and investment, employment, social and cultural order.

Ecological Analysis – An ecological analysis may also be conducted in case of big industrial projects like dams, power projects, nuclear plant, production of drugs and chemicals etc. It helps in determining any damage, threat or loss to the environment due to the project and the restoration measures and cost related to it.

Market Analysis – It involves estimating the potential market and future market share related to the project.

Technical Analysis – It involves analysis of the technology available and technical viability and feasibility of the project.

Financial Analysis – It involves analysis of risks and returns associated with the project.

Selection –

The most attractive project in terms of profitability and feasibility is chosen by the company. Capital budgeting techniques are used to appraise each project and various discounting and non-discounting techniques are used to determine the most profitable one in terms of –

Financing – All short term and long term needs of the project are considered before preparing a budget for the project. Margin money for contingencies is also added to the total budget. Various sources of short and long term funds are explored and the selected project is financed with an optimum mix of debt and equity.

Implementation – It involves the actual execution of the project in a systematic manner according to the project plans and guidelines.

Review – The project has to be reviewed periodically to compare to actual performance with the projected performance, for this purpose a feedback mechanism is developed which helps in future decision making and taking corrective measures to improve performance.

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• Share capital
• Term Loan
• Debenture capital
• Deferred credit
• Incentive sources or Government Subsidies
• Suppliers line of credit
• Unsecured loans and deposits
• Leasing and Hire Purchase

Means of Project Financing –

(1) SHARE CAPITAL

It is the capital raised by a company by issue of shares. It may take two forms –

Equity share capital – It refers to the shared held by the owners of the business. They enjoy the rewards and bear the risks of ownership of  the business. Equity share holders have a voting right but they are paid dividend only after paying dividend to preference shareholders. Dividend on equity shares depends upon the amount of profits and financial position of the business.

Preference share capital – It refers to the shares held by the investors who are not owners of the business. Preference shareholders do not have any voting rights but are they receive dividend at a fixed rate and before equity share holders.

(2) TERM LOAN – Term loans are provided by Financial Institutions and Commercial banks. It represents secured borrowings for financing new projects as well as expansion, modification, renovation schemes.

It can be of two types –

Rupee term loans – They are given for financing land, building, plant & machinery etc.

Foreign currency term loan –They are given to meet foreign currency expenses towards import of machinery, equipment and technology.

(3) DEBENTURE CAPITAL – Debenture capital is a financial instrument for raising long term debt capital. It may be convertible or Non convertible.

Non-convertible debentures are straight debt instrument carrying a fixed rate and have a maturity period of 5-9 years. If interest is accumulated it has to be paid by the company by liquidation of its assets. It is an economical method of raising funds. Debenture holders do not have any voting rights and there is no dilution of ownership.

Convertible debentures are convertible wholly or partly into equity shares after a fixed period of time.

(4) LEASE FINANCING – It is a contract in which the owner of the asset (lessor) gives right to use an asset to the user (lessee) for an agreed period of time in return of consideration in form of periodic payments called lease rentals. It is used for expansion projects, since repayment can be done immediately through cash generated from existing facilities. It is a popular method of Project financing for large machinery, airplane, ships, property etc.

(5) UNSECURED LOANS – In case of shortage of funds, the promoter of the business may mobilise funds from family, friend and relatives in form of unsecured loans to meet such shortage. Lenders may or may not receive any interest on the amount lend and have no control over management and decision making. In this method of Project Financing the borrower does not have to keep any collateral for the loan therefore unsecured loans are perceived as less risky.

(6) BRIDGE LOANS/FINANCE – These are temporary loans provided by commercial banks to promoters of a business for arranging capital cost of a project. These loans are sanctioned by banks and financial institutions to help promoters in speedy development of a project, in its absence projects may be delayed due to insufficient funds.

(7) PUBLIC DEPOSITS – It refers to funds mobilized from the public and shareholders. These deposits can be taken for a minimum period of 6 months and maximum period of 36 months. The government of India has fixed the maximum amount of deposit at 25% of the paid up share capital and free resources of the company. Only a public limited company is allowed to accept deposits from public and a private company cannot do so, however private companies can raise deposits up to 25% of the share capital from friends, family and relatives.

(8) DEFERRED CREDIT – At times suppliers of plant and machinery offer a deferred payment facility under which payment of plant and machinery can be made after a certain period of time as agreed upon by the buyer and seller at the time of purchase. In order to get deferred credit a person has to furnish Bank guarantee and may even have to mortgage certain assets.

(9) INCENTIVE SOURCES – The Government and its agencies may provide financial support incentive to certain types of promoters for setting up industrial units in certain location.  It may take form of –

• Seed capital assistance
• Capital subsidies
• Tax deferment
• Exemptions

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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 –

Material Cost 

Labour Cost 

Cost of Utilities

Factory Overhead Cost

(i) Material cost – It includes cost of raw material, chemicals, components, and other inputs required for production. These costs may be determined on the basis of theoretical consumption norms, industry experience or specifications provided by machinery suppliers. The following points must be kept in mind when estimating the cost of material inputs –

(a) The total requirement of various materials inputs can be obtained by multiplying Requirement per unit of output by Expected output during the year

(b) The price of material input are defined in terms of CIF (cost, insurance and freight)

(c) While determining the present value of material inputs, inflation factor must be ignored.

(d) There may be seasonal fluctuations in the prices of inputs which must be considered.

(ii) Labour cost – It includes cost of all manpower employed . It is a function of number of employees and rate of remuneration. Manpower includes the number of operators for operating various services, number of Supervisors and Administrative staff.

Remuneration may be calculated on the rate prevailing in the industry. It must include basic pay, dearness allowance, conveyance allowance, travel concession, provident fund contribution, medical, bonus etc. Payment related to vacation, overtime, night work, work on holidays must also be included.

(iii) 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.

The Cost of power includes bought out power estimated on the basis of charges of the concerned electricity board.

The Cost of water includes charges paid to local authorities.

Cost of fuel consists of cost involved in buying coal, fire, wood, bio gas etc.

(iv) 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.

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. Due to constraints like raw material shortage, limited power, marketing problems etc. It is sensible to assume low capacity utilization in the first year. A reasonable assumption would be – 40% – 50% of installed capacity in first year, 50% – 80% in 2nd year, 80% – 90% in 3rd year onwards.

(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 considered should be the price realizable by the company net of excise duty. It shall however include dealer`s commission.

(iv) 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. Therefore, if a part of production is saleable at controlled price, sell that part at the controlled price.

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
7. Sales after adjusting stocks
8. Value of sales 

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The Cost of Project represents the total of all items of outlay associated with a project which are supported by long term funds. It is crucial that the Cost of Project is accurately estimated as under estimation of costs will lead to shortage of funds. In case of over estimation of costs there will be idle funds that will be invested elsewhere by the promoter which will effect the speed of the project.

It is the sum of the outlays on the following →

(i) Land and site development → It includes :-

• Basic cost of land and conveyance charges
• Premium payable on lease hold and conveyance charges
• Cost of leveling and development
• Cost of laying roads and internal roads
• Cost of gates, tube-wells etc.

 It varies from location to location and depends upon the topography of the land.

(ii) Building and Civil Works → It includes cost of :-

• Building for main plant and equipment
• Building for auxiliary services, water supply, laboratory, workshops etc.
• Godowns, warehouses and open yard facilities
• Non factory buildings like factory, guest houses, time office, excise house etc.
• Quarters for essential staff
• Silo’s tanks, wells, chests, bins etc.
• Garages, Sewers, drainage etc.
• Other civil engineering works depend upon kind of structure required
• Buildings to fulfill requirements of manufacturing process

(iii) Plant and Machinery → It consists of :-

(a) Cost of imported machinery –

• FOB(free on board) Value
• Shipping
• Freight
• Insurance cost
• Import duty
• Clearing loading, unloading and transportation cost

 (b) Cost of indigenous machinery –

• FOR cost (free on rail)
• Sales tax and Octroi tax
• Railway freight and transportation charges

(c) Cost of stores and spares

(d) Foundation and installation charges

(iv) Technical Know-how and Engineering Fees → Costs involved in :-

• Recruitment of technicians in India or abroad
• Training of employees of production process
• Procuring technology
• Royalty fees to technology provider

(v) Expenses on foreign technicians and training of Indian technicians abroad

(vi) Preliminary and capital issue expenses →

 Preliminary expenses are expenses incurred in :-

• Identifying the project
• Conducting market research
• Preparing feasibility report
• Drafting Memorandum and Articles of Association
• Incorporation of company

 Capital issue expenses are expenses borne in connection with raising capital from the public. It includes expenses incurred in  :-

• Underwriting
• Brokerage
• Fees to managers and registrars
• Printing and postage
• Advertising and publicity
• Listing fees and stamp duty

(vii) Electricals → Cost of cables, panel boards, voltage stabilizers

(viii) Transportation cost

(ix) Pre operative Expenses →

These are expenses incurred till the commencement of actual production of product. It includes :-

• Rent
• Taxes
• Traveling expenses
• Interest on borrowings
• Insurance and mortgage
• Start up and establishment expenses

(x) Provision for contingencies →

 Funds for contingencies must be kept to provide for unforeseen expenses and price increase over the normal inflation rate.  These situations may arise due to deviation between estimated cost and actual cost. Therefore, 5% – 15% margin is kept on cost of projects.

(xi) Margin Money for working capital →

 The principal support for working capital comes from commercial banks and trade creditors.  A certain part of working capital is required to come from long term sources. It is used for meeting overruns in capital cost.  To mitigate this problem Financial Institutions stipulate a portion of loan amount, equal to margin money for working capital.

(xii) Initial Cash Losses → Most projects incur cash losses in initial year.  Yet promoters do not reveal losses to make the project appear attractive to financial Institutions and the investing public. Failure to make provision for initial cash losses may affect the financial position of the company and impair the project.

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Market and demand Analysis is conducted to know about the aggregate demand for the product or service and the market share that the proposed project will enjoy. 

Market and demand Analysis involves the following activities : –

(A) Situational analysis and specification of objectives →

A situational analysis must be done to know about –

(a) The preferences and purchasing power of customer

(b) Action and strategies of the competitors

(c) Practices of middle man

Specification of objectives helps the organization to move towards a particular direction. The objectives to be focused on are: 

(a) Potential buyer

(b) Total demand

(c) Break up of demand

(d) Type of distribution channel

(e) Prices and warranties

(B) Collection of secondary information →

Secondary data is gathered in some other context and is already available in market.  It is not conducted by researcher himself. A researcher may use the following sources :-

• Census survey
• National sample survey reports
• 5 years plans 
• India year book
• Economic survey reports
• Political survey reports
• Annual survey of industries
• Annual bulletin of export and import
• Stock exchange directory
• Monthly bulletins of RBI
• Publications of advertising agencies
• Industry potential surveys

Once collected, this information is evaluated to judge its reliability, accuracy and relevance to the project.

(C) Conduct of Market Survey →

Secondary data does not provide comprehensive information.  It has to be supplemented with collection of primary data.  Primary information is gathered through market surveys specially for a particular project. Market surveys may be census survey or sample survey. In a census survey the whole population is considered while in a sample survey a sample of population is observed to gather relevant information. They are conducted to gather information regarding –

• Total demand
• Growth of demand
• Income
• Buying motive
• Purchase plans
• Unsatisfied needs and attitude of people towards products and services
• Characteristics of buyer

Steps in Sample Survey →

(i) Defining the target population – The researcher must carefully choose the target population that is to be surveyed. 

(ii) Selecting the sample scheme and size – It may be a census survey or a sample survey.

Probability sampling (Every sample has an equal chance to be selected) OR Non-probability sampling ( No equal chance, some are preferred some are not) method may be used.

(iii) Developing the Questionnaire – A questionnaire may be Structured or Unstructured with Open end questions (give a statement or view) or close end questions (yes/no,multiple choice). After developing the questionnaire a pilot survey is done to look for any mistakes/difficulties.

(iv) Recruiting and training the field investigators – Investigators with good knowledge of the product and good technical knowledge must be recruited and proper training must be provided to them.

(v) Obtaining the information according to questionnaire – The Investigators take personal interviews, telephonic interviews and mail the questionnaires to the sample population to collect responses.

(vi) Scrutinizing the information gathered – The Information gathered may be inconsistent and the responses may be biased. Therefore the information gathered is analysed and scrutinized to eliminate irrelevant and unwanted data.

(vii) Analysing and interpreting the information –  A statistical analysis using Parametric and Non parametric methods is done to analyse and interpret the information.

(D) Characterization of Market 

The market for the product or service is described in terms of the following factors based on the information collected through market surveys and secondary sources. These factors are :- 

1. Effective demand in the past/present and future
2. Breakdown of demand
3. Methods of distribution and sales promotion
4. Types of consumer
5. Listing of supply and competition
6. Government policies
7. Price

(E) Demand forecasting →

It refers to estimation of future demand for a product or service. Forecasting methods may be broadly divided into three categories i.e. Qualitative methods, Time series projection methods and causal methods :-  

Qualitative Methods →

(i) Jury of executive opinion method → It involves soliciting the opinions of a group of Managers on expected future sales and combining them into a sales estimate.

Advantages 

1. It considers a variety of factors
2. Cheap method for developing demand forecasting

Disadvantages

1. The managers may be bias
2. The reliability of the technique is always in question

(ii) Delphi Method → It is used for eliciting the opinions of a group of experts with the help of mail survey.

Steps →

(a) A Group of experts are sent questionnaire and asked to express their views.

(b) The responses received are summarized and another questionnaire based on this response is sent back, not revealing the identity of the experts.

(c) The process is continued till a reasonable agreement emerges.

Time series Projection Method → It involves analysis of historical time series.

(i) Trend Projection Method →  It works on a linear relationship 

Y_t = a + bt 

Where Y_t = demand for a year

              t = time variable

              a = intercept of relationship

              b = slope of relationship

(ii) Exponential smoothing method →  In this method forecasts are modified in the light of observed errors using relationship –

 F_{t + 1} = F_t + d et

Where            Ft + 1 = forecast for the year t+1

                        d = smoothing parameter

                        et = is the error in the forecast for the year t

(iii) Moving Average  Method → In this method forecast for next period is equal to the average of sales in several preceeding years.

Casual Method → It uses the phenomenon of change in one parameter due to the change in another parameter to develop a cause effect relationship which can be converted into quantitative method.

(i) Chain Ratio Method – Under this method the potential sales of a product may be estimated by applying a series of factors to a measure of aggregate demand. It uses a simple analytical approach for estimating demand. Its reliability depends upon the ratio and rates used in the process, one ratio leads to another.

(ii) Consumption level Method – It is used for products which are directly consumed.  Consumption level is estimated on the basis of elasticity co-efficient for a product.

(iii) End user Method – It is suitable to estimate demand of intermediate products and it involves following steps –

• Identifying the possible uses of product
• Identifying the consumption co-efficient of the product for various uses.
• Projecting the output level for consuming industries
• Deriving the demand for the product.

(iv) Bass diffusion Method – It was developed by Frank Bass . Under this method sales is estimated OTB of –

p = co-efficient of innovation

(Probability of people to buy the product because it is innovative)

q = co-efficient of imitation

(Probability of people to buy the product as others have bought it)

The two main question that an analyst has to answer are : Is the product innovative? and Are people buying the product?

(v) Leading indicator method – There are Leading variables which change ahead of other variables called lagging variables. For e.g. Change in level of urbanization used to predict change in demand for cars.

(vi) Econometric method – It involves estimating quantitative relationships derived from economic theory.

(F) Market Planning →

In order to penetrate the market and achieve pre-determined objectives an appropriate marketing plan must be developed covering all aspects related to product, price, place and promotion. It involves the following steps:-  

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Generation and Screening of a project idea begins when someone with specialized knowledge or expertise or some other competence feels that he can offer a product or service

Which can cater to a presently unmet need and demand

To serve a market where demand exceeds supply

Which can effectively compete with similar products or services due to  its better quality/price etc.

An organization has to identify investment opportunities which are feasible and promising before taking a full fledged project analysis to know which projects merit further examination and appraisal.

Tasks involved in Generation and Screening of a project idea

Generation and Screening of a project idea involves the following tasks :-

(1) Generation of ideas –

A panel is formed for the purpose of identifying investment opportunities. It involves the following tasks which must be carried out in order to come up with a creative idea –  

(a) SWOT analysis – Identifying opportunities that can be profitably exploited

(b) Determination of objectives – Setting up operational objectives like cost reduction, productivity improvement, increase in capacity utilization, improvement in contribution margin

(c) Creating Good environment – A good organizational atmosphere motivates employees to be more creative and encourages techniques like brainstorming, group discussion etc. which results in development of creative and innovative ideas.

(2) Monitoring the Environment –

An Organization should systematically monitor the environment and assess its competitive abilities in order to profitably exploit opportunities present in the environment. The key sectors of the environment that are to be studied are :-

(a) Economic Sector –

1. State of economy
2. Overall rate of Growth
3. Growth of primary, secondary and tertiary sectors
4. Inflation rate
5. Linkage with world economy
6. BOP situation
7. Trade Surplus/Deficit

 (b) Government Sector –

1. Industrial policy
2. Government programmes and projects
3. Tax framework
4. Subsidies, incentives, concessions
5. Import and export policies
6. Financing norms

(c) Technological Sector –

1. State of technology
2. Emergence of new technology
3. Receptiveness of the industry
4. Access to technical know how

(d) Socio-demographic sector –

1. Population trends
2. Income distribution
3. Educational profile
4. Employment of women
5. Attitude towards consumption and investment

(e) Competition Sector –

1. No. of firms and their market share
2. Degree of homogeneity and production differentiation
3. Entry barriers
4. Marketing policies and prices
5. Comparison with substitutes in terms of quality/price/appeal etc.

(f) Supplier Sector – Availability and cost of raw material, energy and money

(3) Corporate Appraisal –

It involves identification of corporate strengths and weaknesses. The important aspects that are to be considered are:-

(a) Market and Distribution –

1. Market Image
2. Market share
3. Marketing and Distribution cost
4. Product line
5. Distribution Network
6. Customer loyalty

(b) Production and Operations –

1. Condition and capacity of plant and machinery
2. Availability of raw materials and power
3. Degree of vertical integration
4. Location advantage
5. Cost structure – Fixed and Variable costs

(c) Research and Development –

1. Research capabilities of a firm
2. Track record of new product developments
3. Laboratories and testing facilities
4. Coordination between research and other departments of the organization

(d) Corporate Resources and Personnel –

1. Corporate Image
2. Clout with government and regulatory agencies
3. Dynamism of top management
4. Competence and commitment of employees
5. State of industrial relations

(e) Finance and Accounting –

1. Financial leverage and borrowing capacity
2. Cost of capital
3. Tax situation
4. Relations with shareholders and creditors
5. Accounting and control system
6. Cash flows and liquidity

Tools for identifying investment opportunities →

(a) Porter 5 forces Model → It helps in analyzing profit potential of an industry depending upon strength of –

1. Threat of new entrants
2. Rivalry amongst existing companies
3. Pressure from substitute products
4. Bargaining power of buyer
5. Bargaining power of seller

(b) Life cycle Approach → There are four stages a product goes through during his life cycle each stage represents different investment and net profit value →

(a) Pioneering Stage – In this stage the technology and product is new, there is high competition and very few entrants survive this stage.

(b) Rapid Growth Stage – This stage witnesses a significant expansion in sales and profit.

(c) Maturity Stage – It marks developed industries with mature product and steady growth rate.

(d) Decline Stage – Due to introduction of new products and changes in customer preference the industry incurs a decline in market share and profits.

(c) Experience Curve → Experience curve analyzes how cost per unit changes with respect to accumulated volume of production. Investment must be such that reduces costs.

(4) Looking for Project Ideas –

Various sources to look for good project ideas include:-

1. Trade fairs and exhibitions
2. Studying Government plans and guidelines
3. Suggestion of financial institutions and development agencies
4. Investigating local materials and resources
5. Analyzing performance of existing industries
6. Analyzing social and economic trends
7. Analyzing new technological developments
8. Studying the consumption pattern of people abroad
9. Stimulating creativity to produce new ideas
10. Reducing exports and imports

(5) Preliminary Screening –

It refers to elimination of project ideas which are not promising. The factors to be considered while screening for ideas are:-

Compatibility with the promoter – The idea must be consistent with the interest, personality and resources of entrepreneur.

Consistency with Government priorities – The idea must be feasible with national goals and government regulations.

Availability of inputs – Availability of power, raw material, capital requirements, technology.

Adequacy of Market – Growth in market, prospect of adequate sale, reasonable Return on Investment.

Reasonableness of cost – The project must be able to make reasonable profits with respect to the costs involved.

Acceptability of risk level – The desirability of the project also depends upon risks involved in executing it. In order to access risk the following factors must be considered:-

-Project`s vulnerability to business cycles

-Change technology

-Competition from substitutes

-Government`s control over price and distribution

-Competition from imports

(6) Project Rating Index →

It is a tool used for evaluating large number of project ideas. It helps in streamlining the process of preliminary screening.  Hence a preliminary evaluation may be converted in project rating index.

Steps to calculate project rating index→

I. Identifying the factors relevant for project rating

II. Assigning weights to these factors according to their relative importance(FW)

III. Rate the project proposal on various factors using suitable rating scale (FR)

(5 point scale or 7 point scale)

IV. For each factor multiply the factor rating with factor weight to get factor scores

(FR X FW = FS)

V. All the factor scores are added to get the overall project rating index.

Organization determines a cut off value and the project below this cut off value are rejected.

(7) Sources of the Net Present Value 

In order to select a profitable and feasible project, a project manager must carry out a fundamental analysis of the product and factor market to know about entry barriers which lead to positive net present value. There are six entry barriers which result in a positive NPV project. They are –

1. Economies of scale
2. Product differentiation
3. Cost advantage
4. Marketing reach
5. Technological edge
6. Government policy

(8)Entrepreneurial skills →

An individual must possess the following traits and qualities in order to be a successful entrepreneur –

1. He must be Willing to make sacrifices
2. He must be a good Leader
3. He must be able to make quick and rational decisions
4. He must have confidence in the project
5. He must able to exploit market opportunities
6. He must have strong ego in order to survive ups and downs of a business

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