Project formulation is an investigating process which

precedes investment decision. The purpose is to present

relevant facts before the decision-makers to enable them to
decide as to whether to give go ahead signal should be
given for the project or not.
Formulation of projects involves scientific procedure. The
task of any formidable project is too many.
It has to present several information subjective and
objective in nature. It explains the objectives, goals and
justification for the acceptance of the project.
The major task of the project is to assess the financial,
technical and managerial involvement and its justification
considering the resource constraint.
The project formulation stage involves the identification of
investment options by the enterprise.
Project formulation is designed to bring the project
sponsoring authority and the agencies from whom it has to
gent concurrence, support etc., on one wavelength.
Project formulation by providing a scientifically developed
procedure for developing the content as well as the format
of the investment proportions, seek to streamline the
process of appraisal of project at government and the
aiding agencies level.
So, the project formulation is a process involving the joint
effort of a team of experts including the economists, the
financial analysis and specialists in various fields.


A well formulated project provides a medium which cut
across scientific, social and positional prejudices and
provides a common meeting ground for all those who have
a contribution to make successful implementation of a
project.

Stages in Project Formulation
Feasibility analysis
Techno-economic analysis
Project design and network analysis
Input analysis
Financial analysis
Social cost-benefit analysis
Project appraisal

FEASIBILITY ANALYSIS
Feasibility analysis is the first stages in the process of
project development.
The purpose of the analysis is to examine the desirability of
investing in pre-investment studies.
For this purpose it is essential to examine project idea in
the light of the available
1. internal (inputs, resources & outputs) and
2. external constraints (environment).
When a project idea is taken up for development three
situations can arise.
1. May be feasible
2. Not feasible
3. Data not adequate for arriving decision on further
investment.
Investment in pre-investment studies will have to be
adequate for arriving at reasonable decision regarding
further investment.
Investment in pre-investment studies will have to be
deferred till such time adequate data regarding the project
feasibility is available.
The project sponsoring body will therefore have to invest
in collection of additional data and refer the investment
decision for the time being.
In the second situation when the project is found to be
not feasible, further investment in the project idea is
completely ruled out.
In the third situation, when the project idea is found to
be feasible, the decision-makers can proceed to invest
further resources in pre investment studies and design
development.

Techno-economic analysis
This is primarily concerned with the identification of
project demand ,potential and the selection of the optimal
technology which can be used to achieve the project
objectives.
The analysis provides necessary material on which the
project design can be based.
It also indicates whether the economy is in a position to
absorb the output of the project or not.

PROJECT DESIGN AND NETWORK ANALYSIS
Project design defines the individual activities which go
into the corpus of the project and their inter-relationship
with each other.
It identifies the flow of events, which must take place
before a project can start yielding the results for which it
has been set up.
The inter-relationship between various constituent
activities of a project in most conveniently expressed in the
form of a network diagram.
Project design and network analysis are concerned
primarily with the development of the detailed work plans
of the project and its time profile, and the presentation of
this plan is a form of a detailed network drawing.
Project design and network analysis make available to the
project formulation team a clear picture of the work
elements of the project and also their sequential
relationship.


INPUT ANALYSIS
The objective is to identify and quantify the project inputs and to
assess the feasibility of a sustained supply of these inputs all
through the effective life span of the project.
Resources are consumed in project constituent activities.
The best method of identifying the project inputs is therefore to
identify these activities, determine the resources which each
activity will consume for individual requirements.
After this, proceeds to evaluate the availability of the inputs both
in quantitative as well as qualitative terms.
Resources require for a successful implementation of a project
include not only the material inputs but also human resources
which are necessary both for the setting up of the project as also
its successful normalization run.
Resources requirements estimates form the basis of costs
estimates of the project and are, therefore, essential for
developing the financial profile and cost-benefit profile of the
project.
Financial analysis
The objectives of financial analysis is to develop the
project from the financial angle and to identify these
characteristics.
Financial analysis concerns itself with the estimation
of the project costs, estimation of project funds
requirements, It also involves appraisal of the financial
characteristics of the project so as to establish the
relative merits and demerits of the project as
compared to other investment opportunities.
Financial analysis reduces investment proposition in
diverse fields of human activity to one common scale,
thereby simplifying the project

SOCIAL COST BENEFIT ANALYSIS
In judging the overall worthiness of the project, the effect
of the project on society as a whole is very essential.
While financial analysis evaluates a project from the
profitability point of view, social cost benefit analysis views
it from the point of view of national viability.
The cost-benefit analysis however takes into account not
only the direct costs and benefits which will accrue to the
project implementing body
but also total costs which all entities connected with the
project will have to bear and the benefits which wIll be
enjoyed by all such entities.
The idea here is to evaluate the project in terms of absolute
costs and benefits rather than in terms apparent costs and
benefits.
PROJECT APPRAISAL
Appraisal is the process of consolidating the results of
feasibility analysis, the techno-economic analysis, the
design and network analysis, the input analysis, the
financial analysis and the cost benefit analysis,
so as to give the investment proposition a final and formal
shape, It naturally involves selection of appraisal format,
the material which should go into pre investment report
and the form of presentation of various conclusions.
The sun total of the pre-investment appraisal is to present
the project idea in a form in which the project sponsoring
body, the project implementing body and the outside
agencies can take investment decision regarding the
proposals.
Project formulation process
The main criteria in the project formulation process are:
1. Forecasting understanding and precisely identifying
the objectives/needs/goals (regional/state/national/
international) of the unit/society/economy/on a
sustained basis.
2. Setting up priorities and choosing the goals that are more
urgent
3. Searching for alternations and carrying out feasibility
studies to pick up projects that appear most beneficial
and desirable.
4. Carrying out detailed studies of the project so selected
5. Estimation the needed resources (human and physical)
and finding the yearly cost and benefit of project
6. Arranging funds both approval and allocation. The successful
implementation of any project depends upon the timely
availability of the required resource as per projections.
7. Preparing of time schedule for all hobs so that the physical and
financial targets of the projects are passed appropriately
8. Distributing the works to various departments or agencies
having the appropriate technical expertise.
9. Execution and controlling the project. This requires frequent
reviewing, updating and constant action to restore the
operation to its planned characteristics.
10. Evaluating the performance of each project to ensure the
worth of good or service for each rupee to be spent.

Module II- Market & Demand
Analysis

CONDUCT OF MARKET SURVEY
Census Survey
Sample Survey
Steps in a Sample Survey
Define the Target Population
Select the Sampling Scheme and Sample Size
Develop the Questionnaire
Recruit and Train the Field Investigators
Obtain Information as Per the Questionnaire from the
Sample of Respondents
Scrutinizes the Information Gathered
Analyze and interpret the Information
Some Problems
Heterogeneity of the Country
Multiplicity of the Languages
Design of Questionnaire

CHARACTERISATION OF THE MARKET
Effective Demand in the Past and Present
Production + Imports Exports Change in stock level
Breakdown of Demand
Nature of Product
Consumer Groups
Geographical Division
Price
Methods of Distribution and Sales Promotion
Consumers
Supply and Competition
Government Policy

Forecasting
Predicting the future
Qualitative forecast methods
subjective
Quantitative forecast methods
based on mathematical formulas

Types of Forecasting Methods
Depend on
time frame
demand behavior
causes of behavior

Time Frame
Indicates how far into the future is forecast
Short- to mid-range forecast
typically encompasses the immediate future
daily up to two years
Long-range forecast
usually encompasses a period of time longer than two years

Demand Behavior
Trend
a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand
occurring periodically

Causes of Behavior

Analytical
Cause effect relationship basis
Quantitative
Explicit

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

JURY OF EXECUTIVE OPINION METHOD
Rationale
Upper-level management has best information on latest
product developments and future product launches
Approach
Small group of upper-level managers collectively
develop forecasts Opinion of Group
Main advantages
Combine knowledge and expertise from various
functional areas
People who have best information on future
developments generate the forecasts

Main drawbacks
Expensive
No individual responsibility for forecast quality
Risk that few people dominate the group
Subjective
Reliability is questionable
Typical applications
Short-term and medium-term demand forecasting

DELPHI METHOD
Rationale
Eliciting the opinions of a group of experts with the
help of mail survey
Anonymous written responses encourage honesty and
avoid that a group of experts are dominated by only a
few members

DELPHI METHOD
Approch
Coordi
nator
Sends
Initial
Questi
onnair
e
Each
expert
writes
respon
se
(anony
mous)
Coor
dinat
or
perfo
rms
analy
sis
Coordi
nator
sends
updat
ed
questi
onnair
e
Coor
dinat
or
sum
mari
zes
forec
ast
Cons
ensu
s
reac
hed?
Y
es
N
o
Main advantages
Generate consensus
Can forecast long-term trend without availability of
historical data
Main drawbacks
Slow process
Experts are not accountable for their responses
Little evidence that reliable long-term forecasts can
be generated with Delphi or other methods
Typical application
Long-term forecasting
Technology forecasting

TIME SERIES PROJECTION METHODS
These methods generate forecasts on the basis of
an analysis of the historical time series.
Assume that what has occurred in the past will
continue to occur in the future
Relate the forecast to only one factor - time
The important time series projection methods are:
Trend Projection Method
Exponential Smoothing Method
Moving Average Method


Trend Projection Method
Advantages
It uses all observations
The straight line is derived by statistical procedure
A measure of goodness fit is available

Disadvantages
More complicated
The results are valid only when certain conditions are
satisfied

Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
F
t +1
= D
t
+ (1 - )F
t

where:
F
t +1
= forecast for next period
D
t
= actual demand for present
period

F
t
= previously determined forecast
for present period
= weighting factor, smoothing
constant

Moving Average
Naive forecast
demand in current period is used as next periods
forecast
Simple moving average
uses average demand for a fixed sequence of periods
stable demand with no pronounced behavioral patterns
Weighted moving average
weights are assigned to most recent data

CAUSAL METHODS
Causal methods seek to develop forecasts on the basis
of cause-effects relationships specified in an explicit,
quantitative manner.
Chain Ratio Method
Consumption Level Method
End Use Method
Leading Indicator Method
Econometric Method

Chain Ratio Method
Market Potential for heated coats in the U.S.:
Population (U) = 280,000,000
Proportion of U that are age over 16 (A) = 75%
Proportion of A that are men (M) = 50%
Proportion of M that have incomes over $65k (I) = 50%
Proportion of I that live in cold states (C) = 50%
Proportion of C that ski regularly (S) = 10%
Proportion of S that are fashion conscious (F) = 30%
Proportion of F that are early adopters (E) = 10%
Average number of ski coats purchased per year (Y) = .5
coats
Average price per coat (P) = $ 200

Market Potential for heated coats in the U.S.:
Market Sales Potential =
U x A x M x I x C x S x F x E x Y
= 280 Million x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10
x200
= $7.88 Million

Breakeven Analysis
Breakeven analysis examines the short run relationship
between changes in volume and changes in total sales
revenue, expenses and net profit
Also known as C-V-P analysis (Cost Volume Profit
Analysis)

Uses of Breakeven Analysis
C-V-P analysis is an important tool in terms of short-
term planning and decision making
It looks at the relationship between costs, revenue,
output levels and profit
Short run decisions where C-V-P is used include
choice of sales mix, pricing policy etc
Breakeven Analysis
Break even point-the point at which a company
makes neither a profit or a loss.
Contribution per unit-the sales price minus the
variable cost per unit. It measures the contribution
made by each item of output to the fixed costs and
profit of the organisation.
Margin of safety-a measure in which the budgeted
volume of sales is compared with the volume of sales
required to break even
Marginal Cost cost of producing one extra unit of
output

Breakeven Formula
Fixed Costs
*Contribution per unit

*Contribution per unit = Selling Price per unit
Variable Cost per unit

Margin of Safety
The difference between budgeted or actual sales and
the breakeven point
The margin of safety may be expressed in units or
revenue terms
Shows the amount by which sales can drop before a
loss will be incurred

Limitations of B/E analysis
Costs are either fixed or variable
Fixed and variable costs are clearly discernable over the
whole range of output
Production = Sales
One product/constant sales mix
Selling price remains constant
Efficiency remains unchanged
Volume is the only factor affecting costs