Unit 2 Project Identification and Selection

Introduction
Objectives
2.2 Project Identification Process Steps in project identification
Importance of project identification Sources for new project ideas
2.3 Project Initiation
2.4 Pre-Feasibility Study
Elements of pre-feasibility study
2.5 Feasibility Studies
Nature or project feasibility analysis Need for feasibility studies
Complements of feasibility study
2.6 Project Break-even point

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Introduction:

Project Identification is a continuous and repetitive process

involving screening, documentation, validation, ranking and
approval of viable project Ideas for an organization.

The systematic effort of screening the ideas generated through

various sources and bringing out most viable and feasible
alternative project ideas is the domain of Project Identification.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Project Identification Process / Steps in project
identification

Project ideas are like other ideas dont take concrete shape
immediately. An idea is first born, it is under incubation for some
time, and consequently, it begins to take some definite shape.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Conceptual stage, a number of project ideas are generated
through interaction amongst various groups of intellectually and
entrepreneurially inclined people in the organization having good
knowledge and concern about the field where contributions are
sought.

Screening stage, the second stage, the project ideas generated

above are screened and a preliminary exercise is conducted to
weed out the bad or unviable ideas. Therefore, it is
understandable that all the given project ideas would not pass the
screening test and only few get short listed for further
examination. Such short listed ideas will be considered while
promoting pre-feasibility studies.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
The third & fourth stages can be termed as investment
opportunity study. It is a preliminary level investigation, yet
extensively conducted to analyze fundamental strengths of the
project idea, and to explore various opportunities of the project.
It has a limited objective of providing planners with a choice of
project alternatives from which they can make a selection.

Pre-feasibility study focuses on answering the essential

questions such as; should we proceed with the proposed project
idea? What are the benefits and drawbacks of proposed project
idea? How much time will it take to conduct the preliminary
study i.e. pre-feasibility study on the financial and other related
economic aspects of the project viability.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Importance of project identification

Project identification helps solve major problems in the planning

stage and addresses to meet diverse needs, while setting clear
objectives of proposed project.
* Identifies and analyses the purpose and scope of a project in
the given situation of an organization or an economy
* Encourages value addition to the existing wealth and capital of
an organization or economy as the case may be through raising
more funds for project execution
* Improves and develops the specific and general infrastructure
of an organization and the economy

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
* Determines basic benchmarks for deciding on various types
and forms of project ideas to materialize
* Helps to identify size of investment and indicates on the
complexity of the project
* Helps define the location and find appropriate technology to be
used while executing the project
* Helps to formulate better marketing strategies to enhance
profitability
* Identifies different constraints in project environment and
formulation
* Evaluates the potential resources to convert an idea into reality
* Analyze the policies of government and various legal
restrictions

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Sources for new project ideas

* Performance of Existing Industries

The present trends and past experiences of industries provide a
good indication about the health of a particular industry.
Changing profitability structure and break-even analysis of
industries offer adequate information about the financial health
of various industrial sectors.

* Availability of raw materials

Availability of suitable resources is a must for any project to take
off. Easy availability of good quality raw materials at cheaper
prices is a boon for any project. Identifying appropriate
technology and resource base will help design a good project idea
and also make use of those untapped resources for the betterment
of the organization as well as economic health.
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
* Availability of skilled labour
For instance, cement manufacturing unit, automobile
manufacturing unit, textile units, pharmaceutical units, sugar
factories, power plants etc. All these projects need not only good
infrastructure base but also to be supported by appropriate
technology and availability of suitable manpower.

* Import/export statistics
A clear understanding on the routine and specific international
transactions between various segments of society will make
project ideas clearer and help reveal potential areas.

* Price trend

* Data from various sources

K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Project Initiation

The Project Initiation Phase is the 1st or beginning phase in

Project Management Life Cycle, since it includes starting up a
new project.
- For starting a new project you have to define its objectives,
scope, purpose and deliverables.
- Appoint a project team, setup the project office and evaluate
the project, for gaining sanction to begin the next phase.
- The function of project initiation is to describe all the
parameters of a project and establish the suitable project
management and excellence environment necessary to complete
the project.
- The project charter development is a crucial initial point for
the project, establishing the project definition which acts as the
base for all future efforts..
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
- A project manager is assigned at the commencement of project
Initiation.
- The project manager and project sponsor work together to
identify the essential resources and required team members for
further development of key project parameters which are Cost,
Scope, Schedule, and Quality (CSSQ).
- The project team documents its charge in the form of a project
charter, which is based on the project proposal and business case.
- Approval of the project charter by the project sponsor authorizes
the designated team to begin project planning.
- A project is initiated and submitted to the competent authority
for approval.
- On approval, the project is taken up for further processing.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
 Process Flow

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Formulate a Case Study
Evaluate all proposed projects that has been provided by the
client organization or that has been gathered by technical analyst.
Formulate a case study and assign a new project code to the
nominated project. The business case will be examined by a
screening committee with help of management to decide whether
to accept or reject a nominated project. When a business case is
accepted, the proposed project is forwarded for ranking and
selection. When additional information is received on such
proposed project, the case study may be revised based on the data
and appropriate decision would be taken on the final selection.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Approval and Selection of Proposed Project
Based on the priority and rankings revealed by the expert committee,
the management may then authenticate the final selection of project .
However, despite its selection, it may not deem to be active project
until resources are approved and deployed for initiating.

Rank Candidate Projects

All databank nominated projects must be impartially ranked in
order of importance. The ranking criteria must include:
- Target due dates
- Impact on the total business
- Impact on the technology architecture
- Impact on other applications
- Project size, cost and duration
- Project risk
- Forecasted ROI
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Evaluate Resources
An updated skills inventory must be maintained which is
accessible for project assignment. Moreover, an inventory of
available contract resources must be captured too. These skills
inventory helps to understand the accurate capabilities and
capacities of these resources.

Determine resource needs

Through evaluation of skills inventory and the candidate project
repository, this process will recognize the expected needs for
quantities and capabilities of future resources.
This information will provide:
- The identification of critical training needs
- A basis for employment opportunities
- Criteria for contract personnel
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Pre-Feasibility Study

The chief objectives of conducting a pre-feasibility study are to

determine whether the project is promising or not and also
whether an investment decision can be taken on the basis of the
information furnished at the pre-feasibility stage.
Moreover, it analyses whether the information is adequate to
decide that the project idea is lucrative.
Many project ideas gain life after such a pre-feasibility analysis.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Elements of pre-feasibility study

Project description
The nature of the project output must be clearly described
stating all relevant advantages and disadvantages in comparison
with all the competitive projects in the pipeline.

Description of market
The present and potential market, with its competitive nature,
should be delineated. The description of the market should
include the following:
- Outline of technological variants
- Availability of main production factors

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Cost estimates
Realistic estimates should be made of all cost factors so as to reflect on
all relevant investments and operational costs of the project including
contingencies.

Profitability estimation
The collected information should enable comparison between all
competing projects that are in the pipeline.

Miscellaneous
In addition to the above, some more factors may be considered
especially for new projects. These are:
- General opinion and support of society towards the project or the type
of proposal.
- Educational, recreational, and civic-amenities available in the region.
- Availability of any other alternative sites in the region.
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Focus of Pre-feasibility Studies

Focus Consumer-oriented Projects Society/economic- oriented (defense,

(industrial) infrastructure and others)

Economic growth and development

Competition and survival
Object Standard of living of the society
Demands and preferences quality
Economic sufficiency Regional disparities
New inventions or innovation quality
Global competition

Existing demand vs. existing supply Existing facilities vs. required facilities
Scope of
Gap analysis Present growth rate vs. determined growth rate
Marketability
Consumer behavior towards innovations Social behavior (taboos, customs) vs. the
proposed project

K Deepak Rao, Assistant Professor, A.J.

19
Institute of Management, Mangalore
Feasibility Studies

A feasibility study focuses on the practicality of an idea by

identifying possible problems and gives the answer of one main
question:

The purpose of the analysis is to examine the desirability of

investing in pre- investment studies. For this purpose, it is
essential to examine the project idea in the light of the available
internal (inputs, resources, and outputs) and external constraints
(environment).

K Deepak Rao, Assistant Professor, A.J.

20
Institute of Management, Mangalore
Nature of project feasibility analysis:

In the broadest sense, every rational decision to make a new

investment is preceded by an investigation of the feasibility of the
project, whether or not it is carried out in a formal manner. The
larger the project, the greater will be the investment, and the
more formalized the investigation.

Assurance is needed in the following matters:

- Whether the market exists or can be developed
- Whether raw materials can be obtained
- Whether sufficient labour supply is available
- Whether the local services vital to the project are at hand
- Whether the overall costs for plant equipment, labour, and raw
material input will be of a certain order
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Need for feasibility studies:

In modern times, business operations are complex, requiring

carefully prepared plans. The shareholders, creditors, term
leaders, etc insist on completing the analysis of the scheme.
Without their co-operation, it would not be possible to translate
the idea into action. This feasibility study helps the promoter to
make the investment decisions correctly and to obtain funds
without many difficulties.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Complements of feasibility study:

Project feasibility study comprises of market analysis, technical

analysis, financial analysis, and social profitability analysis.
The analysis is mainly interested only in the commercial
profitability and thus, examining only the market, technical, and
financial aspects of the project.
But, generally the gamut of feasibility of a project covers the
following areas:
* Commercial and economic feasibility
* Technical feasibility
* Financial feasibility
* Managerial feasibility
* Social feasibility or acceptability

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Commercial and economic feasibility
The economic feasibility aspect of a project relates to the earning
capacity of the project.
Important indicators are taken into consideration are:
- Present demand of the goods produced through the project
- Future demand of the goods
- Determining the extent of supply to meet the expected demand and
arriving at the gap.
- Deciding in what way the project under consideration will
have a reasonable chance to share the market.
- Anticipated rate of return on investment.

The commercial feasibility of a project involves a study of the proposed arrangements for the
purchase of raw materials and sale of finished products, etc. This study comprises the following
two aspects:
* Arriving at the physical requirement of production inputs such as raw materials, power, labour, etc
at various levels of output and converting them into cost. In other words, deciding costing pattern.
* Matching costs with revenues with a view to estimating the profitability of the project and the
break-even point. The possibility ultimately decides whether the project will be a feasible proposition
or not. K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Technical feasibility
Feasibility report should give a description of the project in terms
of the technology to be used and the requirement of equipment,
labour, and other inputs. Location of the project should be given
special attention in relevance to technical feasibility. Another
important feature of technical feasibility relates to the types of
technology to be adopted for the project.

The technical feasibility analysis is an attempt to study the project basically

from a technicians angle. The main aspects to be considered under this study
are technology of the project, size of the plant, location of the project,
pollution caused by the project, production capacity of the project,
strength of the project, emergency or stand-by facilities required by the
project sophistication such as automation, mechanical handling, required
collaboration agreements, production inputs, and implementation of the
project.
K Deepak Rao, Assistant Professor, A.J.
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Institute of Management, Mangalore
Financial feasibility
The main objectives of this feasibility study are to assess the
financial viability of the project. Here, the main emphasis is on
the preparation of the financial statement, so that the project can
be evaluated in terms of various measures of commercial
profitability and the magnitude of financing required can be
determined.
- Financial projections for future time periods, including income
statements, cash flows and balance sheets.
- Financial analysis showing return on investment, return on
equity, break- even volume, and price analysis.
- If necessary, sensibility analysis to identify items that have a
large impact on profitability or possibly a risk analysis.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Managerial feasibility
The success or failure of a project largely depends upon the
ability of the project holder to manage the project. A project is a
bundle of activities and each activity has its own role.
Ways to measure the managerial efficiency. They are:
- Skill acquired through training
- Skill acquired through the course of work

Social Feasibility
The interests of the general public, projects which offer large
employment potential, which channelize the income from less
developed areas, will stimulate the small industries.

K Deepak Rao, Assistant Professor, A.J.

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Institute of Management, Mangalore
Project Break-even Point

Break-even is a financial term to describe a business or project

where the sales revenue is easy to calculate. Break-even analysis
provides information regarding whether revenue from a product
or service has the ability to cover the relevant costs of production.
Managers can use this information in making a wide range of
business decisions, including setting prices, preparing
competitive bids, and applying for loans. Break-even analysis
specifies the minimum quantity of sales that will cover both
variable and fixed costs.

K Deepak Rao, Assistant Professor, A.J.

28
Institute of Management, Mangalore
K Deepak Rao, Assistant Professor, A.J.
29
Institute of Management, Mangalore
K Deepak Rao, Assistant Professor, A.J.
30
Institute of Management, Mangalore