File name: Project-appraisal-notes-2

2.1 Scouting for Project Ideas (Discussed)

2.2 Technical Analysis:
2.3 Market Analysis: (self study)
2.4 Selection of Projects:
2.5 Numeric & Non Numeric Models for Project Selection
2.1 Discussed in Class
2.2 Technical Analysis:
Technical Analysis includes the following consideration:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(i)

Material Input & Utilities:

Manufacturing Process Or Technology
Product Mix
Plant Capacity
Location & Site
Machinery & Equipments
Structures & Civil Works
Project Charts & Layout
Work Schedule
Material Input & Utilities: This refers to defining of
material and utilities needed, specifying its properties,
and setting up their supply schedule.
It includes that of:
Raw Material (iron ore for steel)
Processed Industrial material and components
(semi-finished products)
Auxilary Material & Factory Supplies: chemical,
grease, paint, oil, paint, varnish additives
Utilities: water, steam, power, fuel

It means determining what of these are needed, in what

quanity are they needed, what is their source of supply, if a
shortage is faced; wherefrom would they be arranged for.
(ii)

Manufacturing Process Or Technology: This requires

determining

 Alternative Technology: (if more than one technology is

available
The Choice of Technology: This is dependent upon
-Plant capacity
-Input Used
-Investment Outlay
-Use by Other Units
-Product Mix
-Latest Development
-Absorption Capacity
(iii) Product Mix: Dependent upon the needs of the market
(iv) Plant Capacity: This refers to volume or number of units
manufactured per unit of time. This is dependent upon
Technological Requirements: For many industries, there
is a certain minimum economic size determined by the
technological factor.
Input Constraints-shortage of raw material, power, etc
could limit production capacity
Investment Costs-How far an increase in production
would bring about a decrease in cost.
Market Conditions-If market is strong and demand is
high, one would adopt a technology which would permit
more production capacity and vice versa.
Resources how much you can bear
(v) Location & Site: The choice of location is dependent
upon certain factors like
Proximity of Raw Material Source or Proximity to
Markets
Availability of Infrastructure-Power, transport, water
Government Policies-Incentive to certain state would
mobilise one to set up manufacturing base there to
take benefit of (eg) tax holidays, lower power tariff, etc.
Other Factors
(vi) Machinery & Equipments: This is influenced by the
production technology and also the plant capacity. Many
a time some constraints may be faced as a result of
limited availability of power while requirement of power
by the technology is immense. Difficulty ion

transportation or restriction on its import may act as a

constraint.
(vii) Structures & Civil Works: This involves majorly three
activities; they being, site prepration and development,
building and civil works and outdoor works. Site
prepration would involve-grading and levelling of land,
demolition and removal of existing structure (if any),
relocation of existing pipes, cables, powerlines, roads,
etc; reclamation of swamps, drainage, removal of
standing water; connection of utilities from site to public
network
utilities
like
electric
power,
water,
communication, railway sidings, etc.
Building and Structures would include creation of
factory buildings (for production processes), ancillary
buildings for stores and warehouses, administrative
buildings, staff welfare building like canteen and
medical facility and residential buildings too.
Outdoor works would include supply and distribution of
utilities, handling and treatment of emissions and
wastages, transport and traffic arrangement, outdoor
lighting and landscaping as well as laying of boundary
wall and creation of enclosures.
(viii) Project Charts & Layout: This includes a general
functional layout, material flow diagram, production line
diagram, transport layout, utility consumption layout,
communication layout, organisatuon layout, and also
plant layout.
(ix) Work Schedule: Refers to creation of a schedule for
work to be executed. This means making a list of all
activities from project planning to commencement of
production, sequencing these activities, allocation of
time and also resources for executing these activities.
Various tools like Gantt chart, Pet and CPM are used.
2.3 Market Analysis: (self study)
2.4 Selection of Projects:

An organisation gets many new projects (multiple projects).

There are many problems which arise in managing projects
they being:
Delay in execution of projects-Delay in one project causes delay
in other projects too; this is because all these projects use
common resources.
Inefficient utilisation of resources: Leads to peaks and valleys in
utilisation of resources.
Bottlenecks in resource availability: also leads to delay in
projects.
Research reveals also that many projects are cancelled midstream (30%), and even projects which are completed result in
either cost overrun (196%) or in time overruns (220%).
Therefore projects should be selected with care.
If care is taken in selecting projects, the chances of projects
being completed successfully would increase.
What is Project Selection? Project selection is the process of
evaluating proposed projects or group of projects, and then
choosing to implement some set of them so that the objective
of the parent organisation is achieved.
Choosing one out of many projects is difficult; but choosing a
number of different projects (a portfolio) is even more difficult
and complex too. Several techniques are used. To help us
decide we often make use of models.
2.5 Models-Numeric and Non-Numeric Models
What is a Model? Models extract the relevant issues about a
problem from the mass of detail in which the problem is
embedded. It allows to strip away all of the reality from a
problem leaving only the relevant aspects of the real situation
for us to deal with.
The process of taking away the unwanted reality is called
modelling the problem. It is an idealized version of the problem.

A firm should keep these points in mind while selecting a

problem. These are:
Realism: It should reflect the reality of the firms decision
problem.
Capability: It should have the capability to deal with the
relevant aspects of the problem.
Flexibility: It should be able to modify to changing situations.
Ease of Use and ease of implementation: It should be easy to
use and implement.
Cost: Cost associated with gathering data and modelling it
should not be very high.
The different types of models in use are:
Models

Numeric Models
Numeric Models

Scoring Based:
1. Unweighted
0-1 Factor
Model
2. Unweighted
Factor Model
3. Weighted
Factor
Scoring
Model
4. Analytic
Hierarchy
Process

Non

Profitablity
Based:
1. Net Present
Value
2. Internal Rate
of Return
3. Profitability
Index

(I)
(II)

Sacred Cow
Operating
Necessity
(III) Competitive
Necessity
(IV) Product Line
Extension
(V) Comparative
Benefit
Model

Non Numeric Models: These models are basically qualitative

models which do not undertake numerical values for assessing
projects.
(i)

The Sacred Cow: In this the project idea is suggested

by a senior official or powerful person in the
organisation. He suggests by using words like If you
have a chance to see this proposal... or Why dont you
look at this and see if it could be tried out.... Such
ideas are visibly supported by the powers to be. The
idea could be for a new product launch, entering new
market or just about anything. Prime Ministers Swach
Bharat Abhiyaan or Chief Ministers (Kejriwals) OddEven Plan or the Nano Project fall under this category.
Nano was Ratan Tata s baby. The project is sacred in
the sense that it will be maintained unless successfully
concluded or abandoned if the boss declared it as
failure.
(ii) Operating Necessity: This refers to those projects
which are required in order to keep the system
operating. It ensures that there is no halt in carrying out
with daily operations of the organisation. A project to
build a protective dike in case of an impending flood
which is expected to disrupt the plant operation falls in
this category. For such projects, no detailed or formal
evaluation is undertaken. However, the cost is kept as
low as possible.
(iii) Competitive Necessity: Projects undertaken to
maintain competitive position of the organisation fall in
this category. Modernization of plant at SAIL is an
instance. Academic institute undertaking re-structuring
of course curriculum is yet another. Projects falling
under operating necessity are given priority over
projects falling under competitive necessity. For these

projects also, no detail or numeric analysis is

undertaken.
(iv) Product Line Extension: Such projects are
undertaken to fill a gap in the existing product line or
extend a product line. These are based on the foresight
of the CEO as to the likely impact such projects would
have on the performance of the total system.
(v) Comparative Benefit: When an organisation has
many projects to consider, it would select a subset of
these. It is often difficult to decide as to which to select.
This is mainly because the projects differ in terms of
nature, benefits, costs and associated risks involved.
For instance, project for new product development,
project for automation of organisational functioning,
which machine to select in part fabrication process, etc
are all of different from each other but all needed by the
organisation. In such cases, we can use Q Sort method
developed by Helin, et al. It involves a set of steps.
Step-1: Put the projects in three categories; they being
good, fair and poor.
Step-2: If any category (group) has eight or more than
eight projects; mark each as fair-plus or fair-minus.
Step-3: So each group should have eight or less than
eight projects. Now projects in each group are ranked
from best to worst. Any criteria may be used for ranking
(or an overall general criteria may be used).
A committee does this process of ranking of projects.
First, members of this committee individually mark
them; this is followed by a consensus arrived at by all
members.
Step-4: Projects selected on the basis of ranking are
then evaluated financially before a final selection.
Numeric Models can be categories as scoring based
models and profitability based models.
Scoring Models: Such models use multiple criteria to
evaluate a project. Such models vary widely in their
complexity and information requirements.

(i)

Unweighted 0-1 Factor Model: Under this

model, a set of relevant factors are selected by
management. These are listed. One or more raters
score the project on these factors. These raters are
chosen from senior management based on
(a)
An understanding of organisations goals
(b)
Knowledge of firms potential project
portfolio.
The major advantage of this model is that it uses
more than one factors in its decision making process.
However, its disadvantage is that it assumes all
factors (criteria) to be of equal importance.
Illustration-1.
Project:............
Rater:...............
Date:.........
Qualify Does Not
Qualify
No Increase in Energy Requirement

Potential Market Size

Potential Market Share

No New Facility Needed

No New Technical Expertise Needed

Need for External Consultant

(ii)

Unweighted Factor Scoring Model: This

removes the disadvantage of the earlier model.
This incorporates the degree to which the project
meets each criteria which is listed on a scale of 0-5
where 5 represents very good, 4 represents
good, 3 represents fair, 2 represents poor and
1 represents very poor.

Illustration-2.
Project:............
Rater:...............

Date:.........
5

1
No Increase in Energy Requirement

Potential Market Size

Potential Market Share

*
No New Facility Needed

No New Technical Expertise Needed

*
Need for External Consultant

Total Score:
(15+6+2)=23
(iii) Weighted Factor Scoring Model: This is an
improvement to the above model wherein weights
are assigned to each factor; assuming that each
factor is not of equal importance. It assumes that
one factor may be more important than the other;
and these factors are ranked in order (weights
assigned) of their importance. These weights are
multiplied with the factor score to get score for
that factor. These weights are totalled to arrive at
total score for the project.
The weights are generated using any technique
that is accepted by the organisations policy
makers; the most widely used and accepted is the
Delhi method developed by Brown and Dalkey of
Rand Corporation in the 50s and 60s.
Illustration-3.

Project:............
Rater:...............

Date:.........
(weights)

(5

1)
No Increase in Energy Requirement 6
Potential Market Size

Potential Market Share

No New Facility Needed

*
*
*

*
No New Technical Expertise Needed3
*
Need for External Consultant

Total Score:
(6*4+5*4+2*2+1*2+3*1+4*5)=73

(iv) Analytic Hierarchy Process:

Multiple Criteria decision making.
Real world decision problems:
Multiple and diverse criteria
Qualitative as well as quantitative information
Information is decomposed into a hierarchy of
alternatives and criteria
Information is then synthesized to determine the
relative ranking of alternatives
Both qualitative and quantitative information can
be compared using informed judgements to derive
weights and priorities
Eg: Selection of a car (an SUV)
First: Set Objective
Selecting an SUV
Second: Set Criteria

Style, Reliability, Fuel-Economy

Third: Set Alternatives
Mahindras XUV-500, Nissans Terranno, Fords
Endevour, or Renaults Duster
Construct the Hierarchial Tree*
Rank the Criteria- How do you determine the relative
importance of these criteria? Style more important
than reliability; or reliability more important than
style but less important than fuel economy?
According to me:
Reliability is twice as important as Style
Reliability is four times as important as Fuel Economy
Style is three times as important as Fuel Economy
Create a Symmetric Matrix:
Table-1
Style
Reliability
Fuel Eco
Style
1/1
1/2
3/1
Reliability
2/1
1/1
4/1
Fuel Eco
1/3
1/4
1/1
Now, Rank the Priorities:
Eigenvector
Iterate
1. Take successive squared power of matrix
2. Normalize the rows
3. Repeat, until difference between the successive
row sums is less than a pre-specified value
Steps to follow:

Step-1. Set Objective

Step-2. Set Criteria
Step-3. Set Alternatives
Step-4. Construct the Hierarchial Tree*
Step-5. Rank the Criteria
Step-5. Make Symmetry Matrix
Step-6. Convert this to decimal
Step-7. Multiply rows with columns to get row values
Step-8. Add row values to get row sum

 Step-9. Add row sums to get total of row sums

Step-10. Divide each row sums with total of row
sums
Step-11. Get normalized vector as shown below
Step-12. Re-iterate. (repeat from step 7 to 11)
Step-5
Style
Reliability
Fuel Eco
Step-6
Style
Reliability
Fuel Eco

Style
1/1
2/1
1/3
Style
1
2
0.333

Reliability
1/2
1/1
1/4
Reliability
0.5
1
0.25

Fuel Eco
3/1
4/1
1/1
Fuel Eco
3
4
1

Step-7 Multiply rows with columns to get row values

1
0.5
2
1
0.333
0.25
Row 1: Cell 1: (1*1)+(0.5*2)+(3*0.333)=2.999

3
4
1

Cell 2: (1*.5)+(0.5*1)+(3*0.25)=1.75
Cell 3: (1*3)+(0.5*4)+(3*1)=8, similarly all row values are
arrived at.
Squared values are depicted below:
3.0
5.3332
1.1666

1.75
8.0
3.0
14.0
0.6667
3.0
Step-8 Add row values to get row sum. The Row
Sums are:

12.750
22.333
04.833
Step-9. Add row sums to get total of row sums
12.750+22.333+ 04.833=39.912
Step-10. Divide each row sums with total of row
sums to get normalized row sum.
12.750/39.912=0.3194
22.333/39.912=0.5594
04.833/39.912=0.1211
Step-11. Get normalized vector as shown below.
0.3194
0.5594
0.1211
Step-12. On re-iteration we get values as:
.3196
.5595
.1211
Next: On subtracting values of step 11 from values of step
12, we get the following values(-0.0002), (0.0011) and (0.0009)
We accept these as values showing our preference:
0.3196 for style, for reliability and for fuel economy.
0.5584
0.1220
WE RUN THE SAME FOR RANKING ALTERNATIVES BASE
ON RELIABILITY, STYLE AND FUEL ECONOMY. (illustrated in
class)
Now we rank alternatives as shown below:
XUV

Style
.1160

Relia
.3790

Fuel
.3010

.3196

0.3060

Terr
.2470
Ende
.0600
Dust
.5770
Explanation:

.2900
.0740
.2570

.2390
.2120
.2480

*
*
*

.5584
.1220

=
=
=

0.2720
0.0940
0.3280

(.1160*.3196)+ (3790*.5584) + (.3010*.1220) =0.3060

(.2470*.3196)+ (.2900*.5584) + (.2390*.1220) =0.2720
(.0600*.3196)+ (.0740*.5584) + (.2120*.1220) =0.0940
(.5770*.3196)+ (.2570*.5584) + (.2480*.1220) =0.3280
Profitability Based Models: These models see the return from
the project and compare then with the cost incurred.
These are-Payback Period Method, Net Present Value, Internal
Rate of Return, and Profitability Index Method.
There are also extension of NPV and IRR that is, Modified NPV
and Modified IRR. These were discussed in class.
Problems in AHP.
1. I have to choose between Dell (D), Lenovo (L) and Apple
(A). Seeing the hardware configuration (HC)
Apple is 6 times better than Dell
Apple is 8 times better than Lenovo
Dell is 4 times better than Lenovo
(Priority vectors-0.754, 0.181 and 0.065)
User friendly (UF)
Apple is 5 times better than Dell
Apple is 4 times better than Lenovo
Lenovo is 3 times better than Dell
(Priority vectors-0.674, 0.101 and 0.226)
Hardware Maintainability (HM)
Apple is 7 times better than Dell
Lenovo is 5 times better than Apple
Lenovo is 8 times better than Dell
(Priority vectors-0.223, 0.055 and 0.713)
Financing Availability (FA)
Apple is 8 times better than Dell
Apple is 6 times better than Lenovo
Lenovo is 4 times better than Dell

(Priority vectors-0.754 ,0.065 and 0.181)

Find final priority if HC, UF, HM, and FA are 0.553, 0.131,
0.271 and 0.045 respectively.
Ans: .0.680, 0.130 and 0.190
(Feb.10, 2015)
Problems on AHP (2016):
1. A customer wants to buy toys for his nephew on his birthday. Two criteria play in his mind.
Should the toy be entertaining or educative? According to him educative value of a toy is
three times more important than entertainment value. Further, the shop he visits has electronic
and mechanical toys only. Electronic toys are four times more in importance in educative
value than mechanical toys. But mechanical toys are twice as entertaining as electronic toys.
Using Analytical Hierarchy Process (AHP), illustrate the customers preference.
2. Peter has two job offers in hand- from HDFC and ICICI. He bases his evaluation on three
criteria-they being location, salary and job content. Location is three times more important
than salary content and two times more important than job content. Salary is four times more
important than job content. (First create criteria weights then find ranking of alternatives
between the criteria). Location offered by ICICI is six times better than that offered by HDFC
and job content is two times better than that offered by HDFC. However, salary offered by
HDFC is five times better than that offered by ICICI. Using Analytical Hierarchy Process
(AHP), illustrate Peters choice.
3. Suppliers are selected based on two parameters-they being quality and flexibilty. Quality is
five times more important than flexibility. There are two suppliers A and B of a product.
Supplier A offers quality which is three times better than that of B; but supplier B offers
products which is two times more flexible than A. Using AHP, help the manager decide
between the suppliers A and B.
4. A company has to make a choice of media. The alternatives are between- TV, newpaper or
billboards. Two criteria are of importance-cost and coverage. (First create criteria weights
using this information*). For the company, coverage is four times more important than cost.
TV provides four times more coverage than news paper and six times more than bill boards.
Newspaper provides twice more coverage than bill boards. (*then find ranking of
alternatives; here the alternatives TV, news paper or billboards are between the criteria). TV
is three times more costly than newspaper and five times more costly than billboards; while
newspaper is thrice as costly as bill boards. Using AHP, help the company to make a choice
of media.
5. A customer wants to buy a mobile. Two criteria weigh in his mind. They are sturdiness and
visual appeal. According to him sturdiness is four times more important than visual appeal.
He has two alternatives in his mind-Samsung and Sony. A Samsung mobile has three times
more visual appeal than Sony mobile; while a Sony mobile is twice more sturdy than

Samsung mobile. Using Analytical Hierarchy Process (AHP), illustrate the customers
preference.