014 Project Development and Management

Project Development
and Management
EnP Aida Reyes Rejano

Program vs. Project
 Program. A collection of complementary projects/activities
formulated to achieve the functions/objectives of a sector.
Programs describe in detail the kind and quantities of
resources to be used.
 Project. A set of specified activities carried out by a project
team of an executing agency in a fixed/limited period of
time for a specific area of operation using limited resources
in order to achieve specified outputs/objectives for a
particular target group (NEDA, Project Development
Manual)
• A one-time activity with a well-defined set of desired goals
and results. It can be divided into subtasks that must be
accomplished in order to achieve the project goals. The
project is complex enough that the subtasks require careful
coordination and control in terms of timing, precedence,
cost, and performance (Meredith & Mantel)
• Distinguished from a program, a project is smaller, has
separable operational elements that lend themselves to
being planned, financed, and implemented independently
© ECOPOLIS 2009 ® PAGE 2

Attributes of a Project
 investment not only on physical infrastructure
facilities but also development services (e.g.,
agricultural extension, research, training, etc.)
 Project is means to an end; solution to problems
or needs
 Goal oriented.
• Involves the coordinated undertaking of inter-
related activities
• Finite duration, definite time limit
• Specific physical boundary
• Specified and quantified costs and benefits
• Organization and Management structure

Classification of Projects
• Based on Objectives (social development,
economic growth, historical preservation)
• Sectoral (transportation, agriculture, tourism,
nutrition)
• May be classified new project, improvement
project, or replacement project
• Number of purposes (single, multiple)
• In relation with other projects, may be
classified as multi-goal, complementary, or
mutually exclusive project
• Period of implementation (short or medium or
long-term)
• Methodology and process (e.g. Build-Operate-
Transfer (BOT) projects
Project Planning
• Rational determination of how to initiate,
sustain and terminate a project
• Developing the plan in a required level of
detail with accompanying milestones and
the use of available tools for preparing
and monitoring the plan
• Must be preceded by a comprehensive
development plan (for public sector
planning) or a strategic plan (for private
sector planning)

Stages of Project Development
1. Identification Stage
2. Preparation Stage – Pre-Feasibility
and Feasibility Studies
3. Proposal Appraisal and Financing
4. Detailed Design and Engineering
5. Project Implementation Stage
6. Monitoring & Formative Evaluation
7. Ex-post facto Project Evaluation
Project Development Cycle
Project Identification
Ex-post facto Project Preparation &

Project Evaluation Feasibility Analysis
Monitoring and Formative

Evaluation
Project Appraisal,
Approval & Financing
Project Operation
Project Detailed Design/

Implementation Engineering
Project Activation/
Organization
Project Life Cycle

Project Development Cycle
(NEDA)
1. Pre-investment Phase
• Project Identification
• Project Preparation
• Project Appraisal and Financing
2. Investment Phase
• Detailed Engineering and Design
• Project Implementation
3. Post-investment Phase
• Project Operation
• Ex-post Evaluation

NEDA

Project Identification
• ideas are conceived, identified, generated and selected
• Identify projects that will be subject to tests of a Feasibility
Study
• Sources of Project Ideas
– Promising investment opportunities
– Development constraints / issues
– National, regional, local development plan
– Sectoral studies
– Investment plan
– Special studies, sub-national studies
– Technical linkages
– Industry studies or Market studies
– Could come from politicians, local officials, advocacy groups,
civil society

•
Project Preparation Stage
Stage where project is investigated in its the various
aspects.
• Conduct of feasibility study to determine whether the
project can and should be undertaken and if so, how
and when
• Two general steps:
– Preparation of FS to determine whether or not to proceed with the
project
– Detailed planning and analysis
• establish the basic desirability of a project and identify
the high priority projects
• refines the elements described in the identification
phase and includes all steps necessary to bring the
project to the stage of appraisal
• project is designed to achieve maximum benefits at the
lowest possible costs to ensure achievement of project
objectives and strategies

•
Pre-Feasibility Studies
Narrow down the range of possible alternative solutions
• Ascertain whether on the basis of results obtained, the allocation
of scarce resources for the preparation of a more detailed FS is
warranted
• Establish the work program for further development of the project
• Major Steps in the Pre-FS
1. Rapid analysis of demand
2. Alternative technical schemes to meet the demand
3. Implementation and operating costs of each alternative (based on cost
standards)
4. Benefits derived from each alternative
5. Cost and benefit comparisons to ascertain financial and economic
feasibility of each alternative
6. Plan for subsequent stages of project development
• Decisions after the Pre-Feasibility
– Reject the project
– Defer conduct of detailed FS
– Proceed directly to detailed design and implementation
– Conduct a detailed FS

Elements of Feasibility Study
FS details the following:
1. Market Aspects
2. Technical Aspects
3. Environmental Aspects (EIA)
4. Financial Aspects
5. Economic Aspects
6. Social Aspects
7. Organization and Management
Aspects
FEASIBLE OR NOT FEASIBLE
Feasibility Institutional Study
Analysis Economic Study
Financial Analysis
Social Impact Assessment
Environmental Impact Assessment
Technical Study/Operations Study
Market Study
Terms of Reference for Conduct of FS
• Objectives of the Study
• Scope of Study
• Methodology
• Program of Work
• Resource Requirements
• Participating Entities

Elements of Project Proposal
• Statement of Work / Scope of Work
• Project Specification
• Cost Estimate
• Financial Plan
• Functional Plan
• Plan Format

Practical Considerations for the
Planning Team
• Need to organize people to effectively plan. Need to develop a
supportive environment
• Need to balance technical skills with behavioral skills
• Need to gather first hand information. Focus only on data
actually required for the project
• Need to develop confidence and exercise judgment. Extensive
use of judgment, based on experience and insight, to
complement factual information which may never be fully
satisfactory
• Need to focus on more critical aspects of the project. Focus on
activities necessary to ensure successful project
implementation, such as on institution building, scheduling, and
budgeting
• Need to keep a critical and open mind
• continuous monitoring on both project activities and the
environment to ensure timely response to new opportunities
and unexpected problems
• selective standardization and replication in project design, and
the use of pilot projects to optimize limited manpower and
expertise
Market
Study
Objectives of a Market Study
• To determine the extent to which
products, goods, and services to be
generated by the project are needed or
demanded by its target beneficiaries
• To design the appropriate marketing
strategies and plans that will help ensure
that a project’s target beneficiaries /
users are reached and will accept the
project outputs at given prices
• To assess the supply of a good or service

Definition of ‘Market’
• A market is a mechanism through which a collection of
buyers and sellers interact and engage in exchange. The
decisions made in markets result from the interaction of
millions of people, each motivated by their own interest
• The important point about a market is not what it looks
like (stock exchange, cyber exchange, black market,
talipapa, tiangge or bazaar), but what it does– it
facilitates trade.
• Most products or commodities on the market have
“exchange values.”
• Some goods and services do not necessary carry a price
tag, they are unpaid and are called “Use Values”– for
example, environmental amenities at a natural park, 8-
hours household chores of a housewife, etc.

Information necessary in
analyzing demand and supply
• Must clearly define the types and nature
of products and services to be generated
by the project, their specific uses,
potential users, geographic influence
areas, and other characteristics
• General description of the sectoral and
geographical areas of influence

Demand Analysis
• Identifies and analyzes demand

determinants
• Estimates past and present market
demand for the output/s of the
proposed project
• Projects future demand

Determinants of Demand
• Population
• Per capita Income
• Prices (in the case of marketed goods)
• Substitution possibilities
• Consumer preference
• Changes in users’ tastes
• Rates of investment

Consumer Demand or Final Demand
• reflects demand for a product for final
consumption purposes
• For example, demand for basic
commodities like housing, clothing,
education and other basic services
• The relationship between demand
determinants such as income and prices
and demand for a consumer good can
often be described mathematically

Producer Demand or
Intermediate Demand
• Producer is the demand for a product
used as an input in the production of
goods and services
• Also called derived demand
– e.g., demand for oil used for industrial
purposes; research for productive
applications
• Depends on the nature of production
processes, scale of operations, rate of
investment and ultimately on the level of
demand for its own product

Demand for Social Services
• There are necessary public goods and services such as
primary health care, education, extension services,
transport infrastructure, research, public services like peace
and order, fire fighting, sanitation etc. --- that are not sold
in the market and therefore have no market price
• Special case of consumer demand where services have no
market price, where needs are usually unlimited, and where
instead of consumer incomes, the limiting factor is
government’s ability to pay -- Government policies and
budget
• For social development projects, demand can be estimated
by assessing the adequacy of various types of social
services already being provided by the public sector
• To estimate need for educational services
– Analyze indicators such as literacy rates of age-specific
populations, employment ratios, student-teacher ratio,
etc.
Estimating Past and Present
Demand
• Sources of Data
– First hand data
– Secondary data
– Interviews and Special Surveys
• Historical Data Coverage
– Use of time series data in demand
projections

Methods of Projecting Demand
• Survey of People’s Intentions and
Needs Assessment
• Expert’s Opinion
– Group discussions
– Pooled individual estimate method,
– Delphi approach
• Time Series Analysis
• Statistical Demand Analysis
• Use of Planning Standards
• Market Testing
Other Demand Considerations
• Attitudes
• Availability of institutions
• Users’ behavior change
• Price fluctuations

Supply Analysis
• Identifying Supply Sources
• Estimating Past and Present Supply
• Projecting Supply

Identifying Supply Sources
• Identification of current sources of goods
and services
• Examine supply with respect to volume
of output, capacity distribution, service
area, and other relevant characteristics
• In the case of social services and other
public goods, supply sources can be
analyzed by specifying the agencies
currently rendering social services,
identifying their service areas, and
evaluating the level of service they
Estimating Past and Present
Supply
• Historical estimates of supply, historical
trends and fluctuations due to influence
of economic and social policies and
technological changes on the supply
determinants
• In the case of social development
projects, use appropriate social service
indicators to analyze past and current
supply situations

Projecting Supply
• Consider rated capacities and
production efficiencies

Demand-Supply Consolidation
• Compare projections of demand and
supply to determine if there’s a market
for a good or service, and to what extent
• Past and present supply demand gap
• Future supply-demand gap, without the
project
• Future supply-demand gap, with project

Other Market Considerations
• Competitiveness of the Product
– Pricing and quality of the product
– Look at costs of alternative products
• Government Policies
– For example, existing trade agreements,
tariff rates, financial tax incentives,
quantitative import and export restrictions
that might affect the overall marketability of
the product
• Marketing Program
– A good marketing plan can be a substitute
for the demand-supply analysis
Other Market Considerations
• Demand-supply gap may not be
necessary when:
– The exporting country has a
comparative advantage
– Lower per unit cost of production or
economies of scale

Technical
Study
Nature and Objectives of
Technical Analysis
• identify and analyze alternative ways of carrying out a
project in terms of size, location, basic technical
features, resources requirements, and phasing of
implementation
• Engineering characteristics of each alternative
• Requirements of physical resources for each
alternative
• Plan for construction and operational phases of each
alternative

Technical Alternatives
• Mutually exclusive schemes of meeting
a project’s objectives, i.e., catering to
the demand that the project is meant
to fulfill
• May differ in the following aspects:
– Technology or production process
– Location
– Size or scale
– Timing of implementation

Alternative Technology or
Production Processes
• Based on Product Type
– Quality
– Product range (by-products and multiple
line production)
– Stages of processing
• Based on Production Techniques
– Technical process
– Equipment
– Raw materials
– Level of technology

Alternative Location
(Considerations)
• Geographical distribution of demand
• Transportation costs
• Availability of resources required by
alternative production processes
• Technical or engineering specifications
• Some priority objectives (e.g., to uplift
lagging areas)
• Right-of-way and social acceptance
considerations

Alternative Scales or
Sizes (Determinants)
• Volume and nature of demand

• Minimum scale of operations
• Availability and cost of raw
materials
• Economies of scale

Alternative Timing
• Level of output or production
capacity
• Availability of funds and phasing
of project implementation
• Technical factors (labor intensity
of a project and required
construction period)
• Seasonal weather variations

Technical Research, Survey & Tests
• Field of research and investigations
e.g., topography, hydrology, and soil
investigation
• Geographical coverage (e.g.,
boundaries)
• Degree of detail (refers to the spatial
unit of disaggregation and other
technical details)
• Responsible agencies
• Schedule
• Budget
Description and Basis of
Site Layout
• Need to draw up a site master plan to
indicate the spatial arrangement of
facilities and show allocation of spaces
• Physical characteristics of the area and
capability for various developmental
purposes
• Identify development constraints
– Steep slopes
– Low lying areas
– Areas with weak sub-soil

Description and Basis of
Site Layout
• Show areas suitable for various
developmental uses (residential,
industrial, institutional, etc.)
• Show functional interlinkages of
project components
– Process flow chart (of materials and
manpower)

Design of Basic Civil Works
(Determinants)
• Design Standards or Criteria
– Performance standards, or those
relating to structural characteristics of
the facilities as well as the quality of
the product
– Accommodation standards or those
pertaining to the capacity of the
facilities

Design of Basic Civil Works
•
(Coverage)
Design criteria and standards
• Results of topographic surveys, soils and
materials test, and related engineering
investigations
• Architectural plans of buildings, transport
network, storage system, water supply
facilities, drainage and special structures
• Engineering plans of the above facilities
• Quantity estimates
• Specification of materials and method of
construction
Description of Auxiliary
Engineering Projects
• The project’s technical
production/operation; and
• The persons who will work on the
project

Auxiliary Engineering Projects
(Considerations)
• Determination of size and location
based on project requirements
• Lay-out of facilities in the site
• Establishment of design standards
• Preliminary surveys
• Architectural designs
• Structural designs
• Quantity estimates
• Specifications

Physical Resource
Requirements
• Capital equipment
• Manpower
• Natural resources
• Materials
• Utilities

Pre-operational vs. Operational
Resource Requirements
• Pre-operational
– Final design or detailed engineering
– Actual construction or installation
• Operational
– Actual production
– Operation and maintenance works

Choice of Machinery and
Equipment
• Production process
• Scale of output
• Anticipated company operations
• Costs and availability of spare
parts
• Performance reliability

Labor Requirements
• Detailed breakdown of the

specific types of manpower
required for the construction and
operation of the project
• Include wages, fringe benefits,
and other forms of compensation
for both local and foreign
personnel

Materials
• Adequate descriptions and
specifications of materials needed
in the pre-operational and
operational phases, together with
the relevant factors for selecting
said materials
• Present material balance or
material process chart

Utilities
• Requirements for electricity, fuel,
water, steam, etc.
– Alternative sources
– Costs
– Availability of these resources

Waste Disposal
• Used water and waste materials

• Quantity of waste to be disposed
• Waste disposal methods

Schedule of Resource
Requirements
• Quantity and sources of different
types of resources
• Basis for subsequent costing,
economic and financial feasibility
calculations

Construction Schedule
• Practical operational schedule
• Major construction operations
• Sequence of construction activities, elements
controlling time and costs
• Description of construction methods (manual
labor or automation)
• Phased engineering and construction
schedule (PERT CPM)
• Program of utilization of physical resources
(type and quantity of manpower, materials,
equipment, etc.

Cost Analysis
• To be undertaken by the engineer and
economist
• Methods of Estimating Costs (Sources
of Information)
– Similar projects previously undertaken
– Price survey among suppliers
– Tariff publications, industry or sector
surveys of salaries and wages, materials
costs and utility rates, rules regulating
industry pricing
– Expertise of technical consultants

Cost Analysis
Principal Sources of Errors
– Inadequate technical analysis
– Underestimation of investment
expenditures
– Exclusion of working capital
– Over-optimistic estimates of costs and
outputs in the early years of project
operation
– Absence of explicit assumptions about
future trends of costs

Cost Estimation
CATEGORIES OF COST ESTIMATION BASED ON THE DESIRED
LEVEL OF ACCURACY
1. Order-of-magnitude cost estimates (Ballpark figures)
• usually gross estimates based on the experience and judgment of the
estimator and are sometimes called “ballpark figures”
• typically made without a formal evaluation of the details involved in the
project with estimates ranging from –50% to +50%
• 50% (actual cost)<order-of-magnitude estimate<150% (actual cost)
2. Preliminary cost estimates
• also gross estimates but with a higher level of accuracy.
• more attention is paid to some selected details of the project
• useful for evaluating project alternatives before final commitments are
made
• 80% (actual cost)<preliminary estimate<120% (actual cost)
Cost Estimation
3. Detailed cost estimates
• developed after careful considerations is given to all the
major details of a project
• important for evaluating actual cost performance during the
project and with level of accuracy ranging from –5% to +5%
of the actual cost
95% (actual cost)<detailed cost<105% (actual cost)

Conclusions on Technical
Feasibility
• Size, location and production
processes commensurate with demand
• Engineering features reasonably
designed and architecturally adequate
• Input resources are available in the
required quantities and quality
• Assurance that facilities will produce
goods and services required on a
continuing and dependable basis

Environmental
Study
More details of EIA topic
will be tackled on Day 4 of
the Review Course
Environmental Impact
Assessment
• A tool used by project planners whereby
environmental considerations are analyzed for
the possible impact that its implementation
may have on the deterioration of the
environment
• A process of identifying, predicting, evaluating
and mitigating the biophysical, social, and
other relevant effects of proposed projects
and physical activities before making major
decisions and commitments for their
implementation
Where Environmental Impact Assessment
fits into Integral Planning Process

DOST Sec. Dr. Estrella SIMPLIFIED
G. Alabastro’s Schema PROJECT PLANNING
on the Place of EIA in

Project Development TECHNICAL
and Management FINANCIAL
MARKETING
NATURAL ENVIRONMENT SOCIO-ECONOMIC-POLITICAL

ENVIRONMENT
WATER AIR LAND LGUs SOCIO ECONOMIC
PERMITS
RA 9275 RA 8749 RA 9003 : SOCIO DEV. PROGRAM
MAYOR’S
DAO 34 DAO 2000 81 PD 1152 SANITATION
EMPLOYMENT
DAO 35 MCs RA 7586 CONSTRUCTION
TRAFFIC
A/C A/C RA 8048 FIRE

PO PO NIPAS
VARIOUS LAWS
ORDINANCES, ETC.
Project screening – is an EIA needed?
Scoping – which impacts and issues to consider?
Description of the project/development action
Description of the environmental baseline
Identification of key impacts
Important
steps in Prediction of impacts
Evaluation and assessment of significance of impacts Public
EIA Identification of mitigating measures
Consultation
process
Presentation of findings in an EIS (including a non-
technical summary)
Review of the EIS
Decision-making
Post-decision monitoring
Auditing of predictions and of mitigation meaures

Flow Chart For EIS Preparation
and Submission
Annotated Screen Secondary Envt’l Risk Risk
EIS Outline Alternatives Data Assessment Management
Impact Envt’l Mgmt. EIS

Assemble Data EIS
Scoping Assessment Plan Compilation
EIS Team Gathering Submission
and Analysis Formulation and Writing
Minimum Primary
requirements Data
Financial
Study
Objectives of Financial Analysis
• Financial analysis determines whether the project
is attractive to investors or not
• helps determine a project’s financial sustainability
and overall success
• Assesses the project’s commercial profitability,
sustainability, and capability to service its
obligations (debt-service)
• The analysis looks at the stream of benefits and
costs over the project’s lifetime
• This process requires an understanding of the
concepts, principles and common conventions
that underlie a correct financial appraisal

Financial Cash Flow Statement
• A project’s financial cash flow
statement is a profile of its
receipts and expenditures over
time.
• It is organized into two main
sections:
– Expected financial receipts
generated by the project
– Expected financial expenditures
incurred to generate the project’s
receipts
Organization of Variables in a
Financial Receipts
1. Sales
2. Less: Changes in Accounts Receivables
3. Residual Values
a. Land
b. Equipment
c. Buildings
4. Total Inflows
Financial Expenditures
(i) Investment Opportunities/Opportunity Costs
5. New Investment
(a) Land
(b) Equipment
6. Buildings
7. Existing Assets (if any)
(a) Land
(b) Equipment

Organization of Variables in a
(ii) Operating Expenditures
9. Raw Material (1)
10. Raw Material (2)
11. Raw Material (n)
12. Management
13. Skilled labor
14. Unskilled labor
15. Maintenance
16. Less: Changes in Account Payable
17. Less: Changes in Cash Balance
18. Total Outflow
19. NET CASHFLOW
Components of Cash Flow
Statement
• Investment Plan
– the formulation of an investment plan for
the project based on the information
developed in the technical, demand,
manpower and financing modules
– It consists of two sections:
• Expenditures on new acquisitions and
opportunity costs of existing assets
• Financing aspects of the proposed investments
– If different scales and/or locations are
being considered, corresponding
investment plans for each scale and/or
location should be formulated

Statement
• Opportunity Cost of Existing Assets
– The opportunity cost of using an asset in a
specific project is the benefit forgone by not
putting the asset to its best alternative use
– Highest financial price it could be sold for
– Generally included in the first year
(conventionally year 0) denoting that the asset
could be sold at that time if the project is not
feasible
– On the other hand, the value of an asset is
treated as sunk cost if the asset has no
alternative use. The opportunity cost of such
asset is zero.
Statement
• Investment Financing
– The second half of the investment plan
deals with the means and schedules of
financing investment expenditures
– Whether financing sources were equity
or grants, domestic short-term or long-
term loans, foreign loans, suppliers’
credit, concessional loans and other
forms of foreign aid, these sources
should be identified and disbursement
schedules formulated

Statement
• Operating Plan
– The plan includes all cash receipts generated
from the operations of the business and all
operating expenditures
– Expenditures and corresponding receipts
should be projected by year of operation
– Operating Expenditures should include
internationally-traded and non-internationally-
traded items

Components of Cash flow
Statement
• Cessation of Project Operations
– When the life of the asset extends
beyond the project’s life, then the
asset’s residual value (i.e., the value of
the part of the asset that has not been
used) should also be included in the
cash flow statement (Salvage Value)

Cash Flow Table
Yearly Data
Item (Year 1 – 25)
Cash Inflow
(Financial Receipts)
Cash Outflow
(Financial Expenditures)
Net Cash Flow

Tools of Financial Analysis
1. Test of liquidity – measures used to determine
a firm’s ability to meet short-term obligations,
and to remain solvent in the event of
adversities
Examples:
Current ratio = Current assets/Current liabilities
Quick or acid-test ration = (Current assets – inventories)
Current liabilities
Liquidity of inventories = Cost of sales/Average inventory
Defensive position = Cash + marketable securities + receivables
Projected operating expenditure/no. of days

2. Tests of debt-service – are employed to
present the project’s ability to meet long-term
obligations.
Examples:
Debt-to-net worth ratio = Total liabilities/Total equities
Total capitalization ratio = Long-term liabilities
Long-term liabilities and equities
3. Tests of profitability - show the operational
performance and efficiency of the project.
Examples:
Net profit margin = Net income after tax/Sales
Operating profit margin - Profit before interest and
taxes/ Sales
Cash Flow Analysis
• essential in making choices between mutually exclusive
projects that are competing for limited resources.
Cash Flow Conversion Factors

• Involves the transfer of projects funds from one point in time
to another. The following notation is used for the variables
involved in the conversion process:
i = interest rate period
n = number of interest periods
P = present sum of money
F = future sum of money
A = a uniform end-of-period cash receipt or
disbursement
G = a uniform arithmetic gradient increase in
period-by-period payments or disbursement
Compound amount factor
• The procedure for the single payment compound amount factor
finds a future some of money, F, that is equivalent to a present
sum of money, P, at a specified interest rate, after n periods.
Calculated as: F = P (1 + i)n
Ex. A sum of P 5,000.00 is deposited in a proper account and left

there to earn interest for 15 years. If the interest rate per year
is 12%, the compound amount after years can be calculated as
F = P 5,000.00 (1 + .12)15
= P 27,367.85

Present Worth Factor
• it factor computes P when F is given. The present worth factor
is obtained by solving for P in the equations for the compound
amount factor.
Calculated as: P = F (1 + i)n
Ex. Suppose it is estimated that P15,000,000.00 would be needed
to complete the implementation of a project five years from
now. How much should be deposited in a special project fund
now so that the fund would accrue to the required
P15,000,000.00 exactly five years from now? If the special
project fund pays interest at 9.2% per year, how much the
required deposit would be?
P = P 15,000,000.00 (1 + 0.092) -5
= P 96,600.03

BREAK-EVEN ANALYSIS
• it refers to the determination of the balance
performance level where project income is equal to
the project expenditure
• the total cost of operation is expressed as the sum of
the fixed and variable costs with respect to output
quantity
TC (x) = FC + VC (x)
where x = the number of units produced
TC (x) = total cost of producing X units
FC = total fixed cost
VC (x) = total variable cost associated with
producing x units

Payback Period
• Payback period – the number of years it takes to
recover all the capital invested; projects with
shorter recoupment period than the standard are
considered profitable
• Formula for obtaining payback period:
Payback period = Original Investment

Gross Annual Income
Gross annual profit = simple average of gross income for

each year of the project life
Gross Income for any year is defined as the difference

between revenues and operating expenses for that year

Accounting Rates of Return
“Financial Internal Rate of Return”
Return on Stockholder’s Equity =

Net Income
Equity
Return on Investment =
Net Income
Investment
Return on Assets =
Net Income
Total Assets

Discounting
• Time Value of Money -- Refers to increased value
that money attains over time. Money has the
highest utility value at the present time and its
value decreases as time passes. Hence the
concept of discount rate or interest rate.
• The essence of this concept is that money
received or consumed/spent at a particular time
has a greater value than the same amount of
money received or consumed/spent at a future
time.
• Discounting is the process of converting an
amount of money to its equivalent value at a
different point to its present value.

Discounting
Look at the future value of a peso
today
Pn = P1 (1+r)t
Pn = value of a peso at time n

P1 = value of a peso at initial year
r = interest rate
t = number of years between Pn and
P1
(MAY USE DISCOUNTING TABLE)

Discounting
 Compounding Factor for 1 per annum
It is used to calculate the future
accumulated value (F) at the end of the nth
period at the interest rate of i if a
sequence of equal payments (the amount
of each payment being A) will be made at
the end of each of the n periods:
F = A (1 + i)n – 1
i

Discounting
 Discount Factor
It is used to calculate the present
worth (P) of a future value (F) at the
end of the nth period at the interest
rate; (i) :
P = F • [ 1/(1+i)n ]

Revenue Requirement Analysis
• process of weighing the expected benefit s against the
initial and expected costs over the life cycle of the
project.
• can be done using the information on costs, interest
payments, recurring expenditures and other project-
related financial obligations.
Calculated as: Xn = (G – C –I) – t – P
where G = gross income per year
C = expenses for year n
I = interest payment for year n
t = taxes for year n
P = principal payment for year n

BUDGETING AND CAPITAL RATIONING
Budgeting involves sharing limited resources among

several project groups of or functions in a project
environment
Budget analysis can serve any of the following

purposes:
1. Plan for resource expenditure
2. Project selection criterion
3. Projection of project policy
4. Basis for project control
5. Performance measure
6. Standardization of resource allocation
7. Incentive for improvement

TOP-DOWN BUDGETTING
involves collecting data from upper-level sources such as top and
middle managers
figures supplied may come from their personal judgment, past
experience or past data on similar project activities
top management provides the global budget, while the functional
level worker provides specific budget requirements for project
items
BOTTOM-UP BUDGETTING
• detailed budget request make use of elemental activities and
their schedules, descriptions, and labor skill requirements
• line workers familiar with the specific activities are requested to
provide cost estimates
• estimates are made for each activity in terms of labor, time,
materials and machine time
COST MONITORING
• It is important as project progresses to identify areas of
unacceptable cost performance

CONTRACT MANAGEMENT AND C/SCSC
• It involves the process by which goods and services are
acquired, utilized, monitored and controlled in a project
• It addresses the contractual relationship from the initiation of
a project to the completion of the project (ex. Completion of
services and/or hand over of deliverables).
Important Aspects of Contract Management
1. Principles of contract law
2. Bidding process and evaluation
3. Contract and procurement strategies
4. Selection of source and contractors
5. Negotiation
6. Worker safety considerations
7. Product liability
8. Uncertainty and risk management
9. Conflict resolution

Economic
Study
Finance versus Economics
• “Finance” covers decisions and
transactions internal to an
economic unit– whether
household, project, enterprise, or
agency – regarding the allocation
of resources over time and the
handling of risk, which decisions
are focused on the survival,
maintenance, or growth of that
particular unit.
• “Economics” covers processes
and decisions both internal as
well as external to the economic
unit, including those that impact
on the whole community,
territory or society.
Financial Analysis vs. Economic Analysis
Financial Economic
• Based on cash flow • Considers impacts
analysis of project on all
(i.e., cash likely to stakeholders
be generated by • Taxes are not
project vis-à-vis included in the net
cash needed to benefit
sustain the quantification
project)
• Subject to taxes
Example of calculating
financial and economic prices
CIF* Price of Tires $40
Import Tariff 30% of CIF
VAT 10% of (CIF+Tariff)
Official Exchange Rate (OER) P55/USS$
CIF Price of Tires $40
add: Tariff 30% 0.3*$40 = $12
Price of Tires with Tariff = $52
add: VAT 10% 0.10*$52 = $5.20
Financial Price of Tires in
Foreign Currency $57.20
Economic Price of Tires in
Foreign Currency $40
CIF – cost of insurance and freight-price of an imported good

at the port of destination

Financial Analysis vs Economic Analysis
• Financial analysis examines a project's
financial feasibility from the owner’s point
of view..
– A positive net present value from the point-of-
view of those financial interests, indicates a
positive expected change in the wealth of
these particular stakeholders
• On the other hand, economic analysis
evaluates project feasibility from the
point-of-view of the whole country or
economy.
– A positive economic net present value (NPV)
implies a positive change in the wealth of the
country

Business Profit vs Economic Profit
the same scale of operations, the same Year 1 Year 2 Year 3
capitalization, the same company set-up,
the same product, but different market
shares '000’000 '000’000 '000’000
Annual sales 530 280 260
Factor costs 350 200 195
Annual Depreciation of Physical Assets 10 10 10
Current salary 25 25 25
Annual accounting profit 145 45 30
Interest on capital tied up 15 15 15
Rental value of premises used 4 4 4
Risk premium 6 6 6
Costs of Pollution 20 20 20
Net economic (normal) profit/loss 100 0 -15
 Business Profit or Accounting Profit reflects explicit costs and

revenues. It varies very widely
 Economic Profit is profit above a risk-adjusted normal return and
considers both cash and non-cash items.

Economic Analysis
 examines the maximum net economic benefit
of the proposed project measured in two
terms:
1) the economic impact of the project; and
2) potential for future expansion
 analyzes both “measurable benefits” i.e.
benefits that can be valued at market prices
and “non-measurable benefits” i.e. benefits
that cannot be valued at market prices
 compares economic benefits and costs to be
generated from the project
 determines the project’s net contribution to
the national economic and social welfare

Economic Analysis
• In a perfect economy where there
are no distortions, financial and
economic prices of inputs and
outputs are the same
• However, in an imperfect market
distortions exist in the form of taxes,
tariffs, subsidies, market power, and
externalities

Steps in Economic Analysis
• Estimate national economic parameters
(usually provided by NEDA)
• Estimate economic conversion factors for
each line in the financial cash flow
• Apply the national economic parameters
to the financial cash flow
• Include other economic costs or benefits
(environmental)
• Determine economic viability using
indicators like NPV and Economic IRR
Methods for Comparing Costs
and Benefits
Common objective of comparing
future costs and benefits of the
proposed investment with the aim of
choosing the most economical
investment
1) Net Present Value
2) Internal Rate of Return
3) Cost-Benefit Ratio

Comparison of Criteria
Decision Rules Weaknesses
NET PRESENT 1. Do not accept any project unless
VALUE (NPV) NPV is positive when discounted by the
opportunity cost of the funds
2. To maximize net worth, choose among the
various projects, or scenarios of projects,
the one with the highest NPV. If investment
is subject to a budget constraint, then
choose the package of projects that maximizes
the NPV of the fixed budget
3. When there is no budget constraint and when
a choice muct be made between two or more
mutually exclusive projects, e.g., projects being
considered for the same building site, then
investors who seek to mazimize the net worth
should select the project with the highest NPV
INTERNAL RATE 1. Accept project if IRR > r, opportunity cost of 1. May not exist; may not be unique
OF RETURN (IRR) capital; otherwise, reject 2. Wrong ordering of mutually
2. When comparing mutually exclusive projects, choose the exclusive project, e.g., projects of
one with the highest IRR different scales
3. Not additive
4. IRR generally favors projects with
shorter lives
5. IRR is independent of the timing of the
project (I.e., a project's start date),
whereas NPV is sensitive to timing
6. IRR cannot be used when discount
rate is expected to vary over the years
BENEFIT-COST RATIO 1. Accept project if ratio >1; otherwise reject. 1. No account of scale differences with
(OR PROFITABILITY 2. When comparing mutually exclusive projects, choose the mutually exclusive projects (e.g.,
INDEX) one with the highest b/c ratio larger projects tend to have lower ratios)
2. Ratio is sensitive to definition of costs
Cost-Benefit Analysis
COST-BENEFIT ANALYSIS – a ratio to evaluate
a proposed course of action.. It involves
assessing the costs, benefits, and risks associated
with the decision.
Steps:
1. Compute the total costs associated with the
decisions
2. Estimate the total benefits from the decisions
3. Compare the total cost with the total benefits
As the benefits exceed total cost, an opportunity
becomes more attractive

Cost-Benefit Analysis
Cost/Benefit Worksheet
Alternative Benefits Costs Benefits - Costs Benefit/Cost
Development Projects Ratio
Project 1
Project 2
Project 3
Project 4
Projects 5
If benefit-cost ratio is greater than 1, then the investment is

acceptable. If the ratio is less than one, the investment is not
acceptable. A ratio of one indicates break-even situation for the
project

Benefit-Cost Ratio
• Benefit-Cost Ratio (CBR) – ratio of discounted
benefits to discounted costs; BCR should be
greater than 1; accept project if BCR is
greater than 1
n
Bt

B  t 0 (1  d )
t
C n
Ct

t  0 (1  d )
t
Where Bt – discounted benefits at time t

Ct – discounted costs at time t
Benefit-Cost Ratio
• the ratio of the present worth of benefits to the present
worth of cost.
∑ Bt (1 + I)-t
t=0
B/C =
n
∑ Ct (1 + I)-t
t=0
PWbenefits
=
PWcosts

Benefit-Cost Ratio
 Formula:
n n
B/C Ratio = ∑ bn ∑ cn
t=0 (1+r)
n t=0 (1+r)n
where: bn = benefits generated in year n
cn = costs incurred in year n
n = year as subscript and power
r = discount rate

Definition of Net Present Value
 The difference between the present
value of the benefit stream and the
present value of the cost stream for
a project.
 The net present value calculated at
the Bank’s discount rate should be
greater than zero for a project to be
acceptable.

Net Present Value
• the difference between the net value
of discounted project benefits and
project costs; NPV should be greater
than zero
T T
Bt Ct

t  0 (1  r )
t

t  0 (1  r )
t
0
Where
Bt  monetary value of benefits incurred at time t
Ct  costs incurred at time t
r  discount rate/interest rate
T  life of the project, in years

Net Present Value
Formula:
n
NPV = ∑ bn - cn
t=1 (1 + r)n
where:
bn = stream of benefits generated in
year n
cn = costs incurred in year n
n = ordinal number of years as subscript
r = discount rate
Net Present Value
 It is necessary to choose a discount
rate prior to calculation
 All discounting should be done to the
same base year to allow proper
comparisons of alternative projects
 Not tied to the amount of investment
required, i.e., two projects may have
the same NPV but may have widely
different investment requirements

Economic Rate of Return
• Formula:
ERR = a + b (c/d)
where:
a = lower discount rate that yields a positive
NPV (c)
b = difference between a higher discount rate
that yields a negative NPV (e) and the lower
discount rate (a)
c = the NPV of the lower discount rate
d = the absolute value of the difference
between the NPVs at the two discount rates.

Internal Rate of Return
• Internal Rate of Return (IRR) –
discount rate when NPV is equal to 0;
FIRR should be greater than the
opportunity cost or social cost of
capital
B1  C1 Bt  Ct Bn  Cn
0  ..   .. 
(1  r )1
(1  r ) t
(1  r ) n

Method of computation:
 Select any reasonable discount rate
 Compute the NPV
 If NPV is positive, select larger discount
rate; if negative, select a lower discount
rate
 Re-compute NPV until value of NPV
switches sign
 Using one positive and one negative,
the ERR can be calculated by
interpolation

 The computation of ERR does not need an externally determined
discount factor. Therefore the validity of the ERR does not depend
on whether you have selected the proper discount rate.
 The results are easy to understand because they are equivalent to
the maximum rate of interest at which the project will still be
profitable.
 Some projects may have cash flows for which there may be 2 or
more ERRs, or none. These may happen if there are negative
benefits in the middle of the cash flows.
 In some cases, the ERR may give wrong advice when selecting
between a mutually exclusive projects; the NPV at the
(Opportunity Cost of Capital) OCC of a project with a lower ERR
may actually be higher than that for another project with higher
ERR.
Social
Study
Objectives of Social Study
• Seeks to ensure that a project design reflects the needs,
demands and capacities of those to be affected or
influenced by the strategies, policies, programs and
projects
• Helps to show if a project would create a positive or
negative social impact. It attempts to improve project
design and effectiveness through an analysis of the
project’s social impact on targeted beneficiaries
• identifies the project beneficiaries and losers
• Identifies a project’s impact on different stakeholders
• Social dimensions are incorporated in project analysis to
be able to:
– Help in the design of socially-responsive projects
– Facilitate more effective project implementation
– Forestall some of a project’s potential risks
– Enable a more equitable distribution of project benefits
– Build upon the desirable socio-cultural characteristics of
communities

Two Types of Social Impact Analysis
• Social impact analysis is a tool used to
identify a project’s impact on different
project participants
• Social impact analysis identifies measures
to avoid or minimize a project’s negative
economic and social impact on vulnerable
groups
• Two types:
– Social analysis and assessment
– Stakeholder analysis

Social Analysis and Assessment
• Identify target population or affected
groups
• Assess affected group’s needs and
demands for a project
• Assess absorptive capacity of the
affected groups
• identify institutions that assist
• Gender issues
• Potential adverse impacts
Objectives of Stakeholder Analysis
• identify and define the characteristics of
key stakeholders
• understand the power relations
• assess the manner in which they might be
affected by the program/project outcome
• determine gainers and losers of a project
• assess the capacity of the different
stakeholders to participate

Stakeholders

Stakeholder Analysis or Distributional Analysis
Legend:
Primary (Overt)
Stakeholders
Power Issues P
S
P
S
Primary (Covert)
Stakeholders
c
P P
Secondary
Stakeholders
S
Stakeholder
Public Policy Influence/power
Resource (waste)

• Analysis of the distributional impact of the plan (what
groups will benefit or lose).
• Example in a Rural Area

• Stakeholder analysis goes through six steps:
– Identify the externalities
– Measure the net impact of the externalities in each
market as the real economic value of resource flows less
the real financial values of resource flows.
– Measure the values of the various externalities
throughout the project’s life and calculate their present
value (using the economic discount rate)
– Allocate the externalities among all project stakeholders
– Summarize the distribution of project externalities and
net benefits according to the key stakeholders in society.
– Reconcile the economic and financial resource flow
statements with the distributional impacts.

Externalities
• Externalities –are costs of business not assumed
by the firm and not reflected in the internal
financial accounting of the business but such costs
are shouldered by other people, by government, or
by society-at-large.
• Positive externality. The externality is a bonus or
surplus effect of economic activity, often indirect or
unintended.
• Negative externality. Negative externality is a
cost of business that has not been assumed by the
firm. It can be addressed through government
regulations, taxes, subsidies, or by using property
rights to force firms and individuals to take the
impacts of their economic activity into account.

Examples of externalities
• Environmental externality
• Monopoly externality
• Tax and subsidy for non-traded goods
• Import and export tax for traded
goods
• Foreign exchange externality
• Labor externality (divergence between
the market wage rate and the cost of
employment)

Other Methods in Social Study
• Decision Trees
• Principle of Transitivity
• Social Cost-Benefit Analysis
– assumes that the best plan will deliver the
greatest quantity of benefits in relation to cost
• Cost-Effectiveness Analysis.
– assumes that benefits from alternatives are
equal and analyzes variable costs only

Stakeholder Analysis Framework
Facilitate Poor’s
Group/ Interest Import-
Action Mobilization Access to /Use of
Organiz- in ance of
resources capacity NRM?
ation project resources
Reduce Poverty?
Institutional
Analysis
Project Organization
Successful project management means
establishing, for the duration of the
project, an efficient organization and
management so as to establish
responsibility and accountability. The
organization and management will have to
indicate which entities are responsible for
various aspect of project execution and
operation and that they have adequate
powers, staffing, equipment and finance to
undertake the various functions

Example of Division of Responsibilities
Activity 1 2 3 4 5 6 7
Group
Project Team Leader x x x x x x x
Engineering Specialists x x x
Environmental Specialists x x x x x
Financial Specialists x x x x
Economic Specialists x x x x x x
Administrative Staff x x x x x x x

Organizational Structure
• appointment of one
experienced manager to
run a project full-time
• Organization of project
management functions
in terms of
responsibilities
• assignment of a number
of staff to the project
team
• maintenance of a
balance of power
between the functional
heads and the project
manager
Objectives of Institutional Analysis
 To determine whether the project can be
implemented considering the legal, political,
managerial, institutional, and other administrative
constraints which may interrupt the process of
project implementation
• To ascertain whether the project proponents have:
– Required mandate. Does the proponent have the mandate?
– Adequate human resources. Is it properly organized and
adequately equipped?
• Ability
• Experience
– Are local capabilities and facilities properly utilized?
– Is there need for policy & institutional set up changes
outside the entity?
• Institutional setup does not cover only the
organization but also the policies and procedures.

Institutional Analysis
Mandate
-Borrowing Entity and its

Organization
-Management
-Policies and Procedures
INSTITUTION
Ability & Government

Experience Policies

Objectives of Institutional Analysis
• Assess the ability of the proponent to
deliver on the promised time
• Review project design, particularly
institutional arrangements & linkages
• Assure clear implementation and
operational strategy of implementing
agency or proponent

Three Core Elements
MANAGEMENT STAFF
CAPABILITY CAPABILITY
Ability of the
Organization to
Anticipate and Deal
with Problems
INSTITUTIONAL
CAPABILITY

Management, Staff, &
Institutional Audit
• To determine most appropriate form and internal
structure of proponent:
– Define project’s objectives, scope, components/activities
– Identify other organizations involved
– Define the relationships
• Management adequacy in quantity & quality
– Management upgrading or get management consultants
• Staff members with the needed skills and attitude
• Adequacy of an organization’s power & authority
and relationship with other organizations

Eight-Box Model of Organizational Development
EXTERNAL Task, Products,
ENVIRONMENT (Commodity or
Service)
Vision,
Leadership Mission,
Goals,
Strategy
Technology,
Methods &
Internal Environment Techniques
Structure
Rewards, Organization
Helpful Culture and
mechanisms Values
People
ULTIMATE GOAL IS CITIZEN

SATISFACTION
 External Client (other players /
customers)
 Internal Client (own community)

Project Risks Analysis & Proposal
Evaluation
 Involves monitoring and
understanding the factors that can
reduce project success
 Risk can be analyzed and
evaluated according to probability
and the level of impact they will
have if they do occur

Aims of Proposal Evaluation
• Determine the intrinsic worth of a
project (i.e., whether a project or not
a project should be implemented)
• Determine the optimum timing of the
project (i.e., when a project should
be implemented)
• Solve technical problems posed by
the projects, (i.e., how the project
should be implemented)

Principles of Proposal
Evaluation
• Identify all possible alternatives
(including do-nothing
alternative)
• Quantify seriousness of impacts
• Consider resource needs or
costs of the project

Project Appraisal Stage
• This refers to the evaluation of the project by
those who will finance or put resources into the
implementation of the project
• Appraisal – critical review of all aspects of the
project, considers various measures of project
worth
• Project appraisal is also meant to improve the
accuracy of the measures of key variables if the
project shows a potential for success
• Costs estimates should at this point be highly
accurate, and the sources and nature of
financing identified

Project Financing Stage
• Financing – from among various
sources such as national and local
government as well as external
financing institutions

Detailed Design
• Once the project has been approved for
implementation, the design task should be
completed in more detail.
• Details of the basic programs should be
provided, tasks allocated, resources
determined, and functions to be carried out
along with their priorities set down in
operational form
• At this stage, the accuracy of data from all
study is ascertained so that an operational
plan of action can be developed.
• Not only is the project’s physical design
complete, but even the programs for
administration, operations, and marketing are
now final.
Project Implementation Stage
• This is when the activities necessary to
achieve the objectives and goals of the
project are undertaken
• resources are used to generate the
necessary outputs of the project
• Covers both the completion of
construction activities and the
subsequent operations

Project Evaluation Stage
Post-Implementation
• Ex-post – after project execution, look at
the direct and indirect impact
• This assesses the extent to which the
project has achieved stated goals and
objectives
• This stage assesses the intended and
unintended impact of the project after
the project has been operating for
sometime.

Clarifying Concepts
 Impact - level and changes in the welfare status
of target beneficiaries (What do beneficiaries
gain?)
 Outcome - required changes in the behavior of
target beneficiaries to achieve the desired
welfare status (What do the beneficiaries need to
do differently?)
 Output - government interventions designed to
effectively and significantly influence the target
beneficiaries to make the desired behavioral
changes
 Input - resources and other requirements of
government interventions

References
Badiru, Adedeji B. and Pulat, Simin P. (1998)
Comprehensive Project Management, Prince-Hall, Inc,
Upper Saddle River, New Jersey
Cuyugan, Jorge H. (2003) A Business Planning Manual,
Bright Concepts Printing House, City of San Fernando,
Pampanga
Development Academy of the Philippines (2003) How to
Develop a Feasibility Studies, Philippines
Kaiser, Edward J. et al. (1995) Urban Land Use Planning,
University of Illinois Press, USA.
National Economic and Development Authority. Project
Development Manual. NEDA, 1984
Meredith and Mantel, Jr. (1989)

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Project Development

EnP Aida Reyes Rejano

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Ex-post facto Project Preparation &

Monitoring and Formative

Project Detailed Design/

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Feasibility Institutional Study

Analysis Economic Study

Social Impact Assessment

Environmental Impact Assessment

Technical Study/Operations Study

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• Identifies and analyzes demand

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• Volume and nature of demand

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• Detailed breakdown of the

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• Used water and waste materials

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