Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

PROJECT ANALYSIS & EVALUATION

CHAPTER 1 - INTRODUCTION

Project analysis and evaluation plays a key role in the economic development of
the country. Since the introduction of planning, countries of the world, especially,
developing countries have been investing large amounts of money in projects
related to industry, minerals, power, transpiration, irrigation, education etc. with a
view to improve the socio-economic conditions of the people. The money
invested both in industrial and social projects keeps increasing. These projects are
designed with the aim of earning adequate returns to provide for future
development. But, experience shows that there are several shortcomings in the
ultimate success of achieving the objectives of the proposed projects. One of the
main reasons for the failure of many projects in the developing countries is the
inadequacy of managerial skill for project implementation and imperfect planning
and control of projects.

 Concept and Definition of a Project

A Project is a series of tasks that need to be completed to reach a specific outcome.
A Project can also be defined as a set of inputs and outputs required to achieve a
particular goal. In other words, Project is a complex of economic activities in
which we commit scarce resources in expectation of benefits that exceed these
resources. Still, we can define a Project as an investment made on a package of
interrelated time-bound activities; consequently, a project becomes a time-bound
task.

Project Planning deals with specified tasks and operations of activities, which
must be performed to achieve the project goals. Any project that we may consider
has an objective and has to be operated within a given set of rules, regulations,
constraints and restrictions. Implementation of projects needs resources or inputs.
Every project converts the given inputs into output through a process of
implementation. The outputs in the short run, lead to outcomes which, in the long
run, should result in impact.

Thus a Project can also be defined as a complex of non-routine activates that must
be completed with a set amount of resources and within a set of time limit.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 1
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
 Classification of Projects
Projects can be classified based on several criteria.
1. Ownership
a. Private sector- mostly projects undertaken by business enterprises.
b. Public sector- projects undertaken by national and local government
body.
c. NGO’s – development projects undertaken by non-government and
not for profit organizations.
2. Based on the sources of finance
a. Government treasury
b. Government treasury and external sources
c. External sources of finance.
3. Based on the forces behind
a. Demand driven/need driven- based on identified unsatisfied
demand project can be created or on unsatisfied basic needs like
food, water, and shelter..
b. Donor driven- the force behind the financing organization.
c. Political driven

 Project Management
Is planning, scheduling, controlling and monitoring the complex non-routine
activities that must be completed to reach the predetermined objectives of the
project. It involves the coordination of a group activity, wherein the manager
plans, organizes staffs, directs, and controls to achieve an objective, with
constraints on time, cost and performance of the end product.
 Planning is the process of preparing for the commitment of resources in the
most economical manner.
 Controlling is the process of making events conforms to schedules by
coordinating the action of all parts of the project to achieve the objective.
 Projects Analysis involves estimation and comparing the beneficial effects
of an investment with its costs.

Though it originated many years ago, it has been extensively used in the last
years. The basic ideas of project analysis became clear only after their
applications. In 1830s a problem was formulated in the U.S. in relation to water
resource investments. The costs of investment could easily be estimated. But the
benefits were not that much easy to compute because there was no established
price to value water.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 2
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Thus, guidelines were established for estimating the benefits and costs of water
resource projects. The first use of project analysis was made in the Soviet Union in
1930s. The emphasis was on expanding material production than social service
sectors.

The application of project analysis has been considerably increasing in developing

countries. India provides an example where project analysis has been extensively
applied over a long period in both commercial and non-commercial investments
and in the assessment of private investment proposals. In Jamaica, a committee
primarily assesses the project proposals. Since most of the projects in Sri Lanka
are externally funded, assistance agencies carry out the analysis work, which will
be renewed by managerial planning staff.

Even socialist countries such as China and Mozambique have adapted project
analysis as part of a process of reform. The last two decades have witnessed
serious applications of project analysis in Africa and Asia. Internationalization
(globalization) of products, privatization policies and invitation of foreign
investment has enhanced the applications of project analysis and management
techniques.

 Projects and Plans

Clearly, projects are inevitable for the overall development of the country. Project
planning should always focus on the overall development plans of the
government. The development plan of the government is materialized through
designing various projects. If the development plans of the government are
elaborate, the work of the project planner will be easy. As a minimum, they
should outline the socio-economic pattern of development and should specify the
major objectives. Such objectives as promotion of employment, elimination of
poverty etc. can serve as guidelines to project selection. The project analysis
should always verify that the selected project contributes towards attaining those
objectives.

Drafting developmental plans is, in a way, a careful assessment of development

potentials in various sectors of the economy. In other words, it is identifying and
evaluating specific projects. Projects, thus, contribute towards the formulation of
macro-plans of the country. However, planning the economy and planning
projects can proceed in parallel, reinforcing and refining each other. But, a drive
from the government to direct investment to those sectors where it will yield the
most benefits to the economy will be more encouraging to design projects.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 3
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

It is necessary to formulate projects through proper planning. Project planning is

usually done in a series of stages. These stages include identification of
investment possibilities, their preliminary investigation through a pre-feasibility
study, a more detailed investigation and implementation plan through a feasibility
study, and a decision process accepting or rejecting the project. If the project is
accepted detailed planning becomes necessary for detailed design, financial
negotiations and commissioning the project. A mistake committed anywhere in
the project planning will have its adverse impact on attaining the goals of the
project.

 Project Life Cycle

Project cycle is referred to as the various stages through which project planning
proceeds from inception to implementation. It is the project’s life cycle through
which a project advances from infancy to maturity.
Different guidelines, manuals and foreign authors have called project phases by
different names.

I. United Nations Industrial Development Organization (UNIDO) Project Life

Cycle. UNIDO has divided project cycles into phases and stages as follows.

1. Pre Investment Phase

1. Identification of investment opportunity (opportunity study)
2. Preliminary selection stage (pre-feasibility study/Analysis of Project
Alternatives)
3. Project formulation stage (feasibility study)
4. Evaluation and decision stage (evaluation report/Project Appraisal
and Investment Decision)
2. Investment Phase
1. Negotiation and contracting stage
2. Project design stage
3. Construction stage
4. Preproduction marketing stage
5. Training stage
6. Startup stage
3. Operational Phase
1. Long-term views (expansion, innovation)
2. Short-term views (Replacement and Rehabilitation)

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 4
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

UNIDO PROJECT LIFECYCLE

Pre-selection
Pre-feasibility study

Identification Preparation
Opportunity study Feasibility study

Support Studies
Expansion Pre
Innovation Investment
Operating Phase Appraisal
Phase Appraisal
Replacement Investment Report
Rehabilitation Phase Negotiations and
contracting

Engineering Design
Commissioning and
startup
Construction
Pre-production marketing

Training

Note that,
 The delineation of each phase and each activity from other is not clear
cut/discrete line. There are several activities undertaken in more than one
phase and the transfer is very slow and gradual.

 Activities are sequential but it is also possible to go back and revise some of
the activities after once passing that stage.

 All phases of the project cycle lend themselves to important consultancy

from different disciplines and expertise.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 5
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
A) Pre Investment Phase
Pre-investment phase comprises several stages from identification of projects to
evaluation stage. Support studies are conducted during this stage. It is easy to
understand the scope of an opportunity study. But, it is very difficult to phase
into various stages facilitates for studying the possibility of investing in the project
step by step.

I) Opportunity Studies
Identifying investment opportunities is the starting point in a series of investment
related activities. Potential investors, private or public from developing and
developed countries are interested in obtaining information on newly identified
variable investment opportunities.

An opportunity study must analyze the following

1. Availability of natural resources
2. The existing agricultural pattern that serves as a basis for agro-based
industries
3. Future demand
4. Imports, to identify import substitutes
5. Environmental impact
6. Possible inter-linkage with their industries
7. Possible expansion and diversification possibilities
8. General investment Climate
9. Availability of cost of production factors
10. Export possibility

Opportunity studies can be general or specific.

General Opportunity Studies can be sub divided into:
1. Area studies designed to identify opportunities in region or in an area.
2. Industry studies designed to identify opportunities in an industrial branch
( such as building materials or food processing)
3. Resource based studies designed to utilize natural and agricultural
resources.
A Specific Opportunity Study may be defined as the transformation of a project
idea into a broad investment proposition. It focuses on a specific project.
However, specific studies should follow the initial identification of general
investment opportunities.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 6
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
ii) Pre-Feasibility Studies
The idea of the project that is generated from the opportunity studies must be
elaborated in a more detailed study. But, a feasibility study for a definite decision
is expensive and time consuming. So, before conducting a feasibility study, a
further assessment of the project idea might be made in pre-feasibility study.

Such a study aims at determining whether:

 All possible project alternatives have been examined,
 The project concept justifies a detailed analysis by a feasibility study,
 Any aspects of the project require support studies,
 The project idea is attractive enough for a particular investor or investor
group,
 The environmental situation is in line with the national standards.

A pre-feasibility study should be viewed as an intermediate stage between a

project opportunity study and a detailed feasibility study. The structure of pre-
feasibility study should be the same as that of a detailed feasibility study. The
difference is in the degree of detail feasibility study. Sometimes, a comprehensive
opportunity study may justify by passing the pre-feasibility study stage.

 Support Studies
Support studies cover specific aspects of an investment project in support of pre-
feasibility or feasibility studies. E.g. Market studies, Raw material studies,
Laboratory tests, Location studies etc.

iii) Feasibility Study

Feasibility study aims at providing all data necessary for an investment decision.
Before the final decision is taken to commit resources, the technical, economical
and commercial justification has to be provided in comprehensive and authentic
terms. These should be clarity about the location, the plant size, the material and
the major inputs.

Proceeding from this base, capital outlays, production costs, and expected sales
revenues and return on investments have to be ascertained. It assists in arriving at
the final decision to invest. Feasibility study is an essential document spelling out
the economic viability and prospects of the project. Though the contents of pre-
feasibility and feasibility studies are the same, more accuracy is expected in the
feasibility study.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 7
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
iv) Appraisal Report (Evaluation Report)
When the feasibility study is completed, the various parties involved in the project
will carry out their own appraisal of the investment projects in accordance with
their individual objectives. An evaluation of expected risks, costs and gains of the
project will be done.

The project appraisal should be considered as an independent stage of the pre-

investment phase, marked by the final investment and financing decision taken by
the project promoters.

Appraisal reports are necessary for getting funds from the financial institutions.
They reveal the health of the company to be financed and the protection of its
creditors.

B) The Investment Phase

The investment or implementation phase comprises of the following stages.
1. Establishing the legal, financial and organizational basis for the
implementations of the project.
2. Detailed engineering design and contracting including tendering
3. Acquisition of Technology, Land, construction work and installation
4. Pre-production marketing, including the securing of supplies.
5. Recruitment and training of Personnel.
6. Plant commissioning and start-up

Detailed engineering design comprises preparatory work for site preparation, the
final selection of technology and equipment, the whole range of construction
planning etc. Tendering and evaluation of bids are important to get
comprehensive tenders from competitive suppliers. This stage covers signing of
contracts between the investor and the contractors, architects, suppliers of raw
materials and financing institutions. The construction stage involves site
preparation, construction of buildings and other civil works.

The personnel recruitment and training stage is very crucial for the expected
growth of productivity and efficiency operations. Timely initiation of marketing
arrangements to prepare the market for the new products (pre-production
marketing) and securing supplies are also very crucial for the commencement of
operations of the project.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 8
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
C. The Operation Phase
The problem of the operational phase should be considered from both a short and
a long-term viewpoint. The short-term view relates to the initial period after
commencement of production when a number of problems may arise concerning
such matters as the application for production techniques, operation of equipment
or inadequate labor productivity owing to a lack of qualified staff and labor.

Most of these problems have their origin in the implementation phase. The long-
term view relates to chosen strategies and the associate production and marketing
costs as well as sales revenues. These have a direct relationship with the
projections made at the pre investment phase. If such projections prove faulty,
remedial measures will not only be difficult but may probe highly expensive.

 Expansion Studies
Though the feasibility study aims at new projects, the same techniques can be
applied to the expansion of existing projects. The expansion may be in the form of
1. Increasing the quantity of production or
2. Changing the production program
3. A combination of the two

Expansion should be treated as a new project. In order to prepare a project

proposal, the data of the expansion project must be consolidated with those of the
existing project. Any other changes in location, administration etc. should be
made clear. The financial impact may be expressed in terms of the marginal costs
and benefits.

II. The Baum Cycle (adapted by the world bank in 1970)

Baum Cycle has five stages. The breakdown of the phases in the project cycle is
artificial. In reality the process is continues and iterative. The phases are:
a. Identification
b. Preparation (feasibility study)- ex-ante evaluation
c. Appraisal
d. Implementation
e. Evaluation – added after a certain period (1978). It involves ex-post
evaluation.

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 9
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance

Preparation

Appraisal

Identification
Implementation

Evaluation

III. New Project Cycle (World Bank 1994)

 Emphasis on the issue of participation
 Particularly relevant to projects where beneficiary participation is critical.

 It has four phases

- Listening- listen the stakeholders.
- Piloting- trying it in small scale.
- Demonstrating- demonstrating the pilot
- Mainstreaming- duplicating the pilot.
 Listening - Piloting- Demonstrating – Mainstreaming

Lecture note - Project Analysis & Evaluation. Instructors: Dr. Teferi G & Kassaye T. 2023 (2015) P. 10