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Project Appraisal

Swagat Kishore Mishra

Department of Economics and Finance
WILP: Project Appraisal
Lecture 4

Email: swagat@goa.bits-pilani.ac.in
Tel. 0832-2580207 (O) 08879506995 (M)

1 Course No. ETZC414 Project Appraisal August 24, 2014
Situational analysis
Secondary information collection
Demand forecasting
Market planning
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Market and demand analysis are carried out by the project manager
in the process of evaluating a project idea.
There are six steps in the market and demand analysis: situational
analysis and objectives specification, collection of data, market
survey, market description, demand forecasting and market
The market and demand analysis helps the project manager to
understand how the firms abilities can be synchronized with
market requirements.
Market analysis studies market needs and consumer preferences
for a given project idea and demand analysis aims at calculating the
aggregated demand for a particular product or service.
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Institutional financial markets regulate
Corporate sector
Efficient and stable financial systems are essential for both emerging
markets and low-income developing economies to achieve long-term
balanced development and to absorb various types of shocks. Emerging
market financial systems, including those in Asia, generally have proven to
be more robust and less affected by the global turmoil compared to their
advanced economy counterparts. Governance issues in financial
institutions differ from those in non-financial companies, but are at least
as relevant:
Financial institutions are charged with upholding the public's trust and
protecting depositors. Balance sheets are more opaque, leading to less
transparency and greater ability to conceal problems.
Financial institutions are uniquely vulnerable to liquidity shocks which can
result in institutional, and potentially, financial instability. Sound
governance supports prudential supervision and regulation, enhancing the
role and the effectiveness of the financial institution supervisor.

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The objective of financial sector governance reviews is to strengthen
corporate governance policies and practices of financial institutions in
emerging markets. Until the early nineties, corporate financial
management in India was a relatively drab and placid activity.

There were not many important financial decisions to be made for the
simple reason that firms were given very little freedom in the choice of
key financial policies. The government regulated the price at which firms
could issue equity, the rate of interest which they could offer on their
bonds, and the debt equity ratio that was permissible in different

Moreover, most of the debt and a significant part of the equity were
provided by public sector institutions. Working capital management was
even more constrained with detailed regulations on how much inventory
the firms could carry or how much credit they could give to their
customers. Working capital was financed almost entirely by banks at
interest rates laid down by the central bank.
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The idea that the interest rate should be related to the
creditworthiness of the borrower was still heretical. Even the
quantum of working capital finance was related more to the credit
need of the borrower than to creditworthiness on the principle that
bank credit should be used only for productive purposes.

What is more, the mandatory consortium arrangements regulating
bank credit ensured that it was not easy for large firms to change
their banks or vice versa. The last six years of financial reforms have
changed all this beyond recognition. Corporate finance managers
today have to choose from an array of complex financial
instruments; they can now price them more or less freely; and they
have access (albeit limited) to global capital markets.

On the other hand, they now have to deal with a whole new breed
of aggressive financial intermediaries and institutional investors;
they are exposed to the volatility of interest rates and exchange
rates; they have to agonize over capital structure decisions and
worry about their credit ratings.

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Financial sector reforms are at the centre stage of the
economic liberalization that was initiated in India in mid 1991.
This is partly because the economic reform process itself took
place amidst two serious crises involving the financial sector:

The balance of payments crisis that threatened the
international credibility of the country and pushed it to the
brink of default; and

The grave threat of insolvency confronting the banking
system which had for years concealed its problems with the
help of defective accounting policies. Moreover, many of the
deeper rooted
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problems of the Indian economy in the early nineties were
also strongly related to the financial sector:
The problem of financial repression in the sense of
McKinnon-Shaw (McKinnon, 1973; Shaw, 1973) induced by
administered interest rates pegged at unrealistically low
Large scale pre-emption of resources from the banking
system by the government to finance its fiscal deficit;
Excessive structural and micro regulation that inhibited
financial innovation and increased transaction costs;
Relatively inadequate level of prudential regulation in the
financial sector;
Poorly developed debt and money markets; and
Outdated (often primitive) technological and institutional
structures that made the capital markets and the rest of
the financial system highly inefficient.

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Market and Demand analysis outlines:

i. importance of market and demand analysis in project
ii. aligning all capital expenditure to serve and satisfy the
customers' needs
iii. different methods of demand analysis, their comparative
advantages and disadvantages
iv. increasing emphasis on accuracy in forecasting demands in
the backdrop of fierce competition and changing customer
v. impact of errors in forecast and relationship between
operating costs of forecasts and their accuracy.
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"You can never plan the future by the past"

"I know of no way of judging the future but by the past"

Which forecasting for demand must a company
rely upon?
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Forecast is an estimate of future events and trends and is
arrived at by systematically combining past data and
projecting it forward in a predetermine a manner.
Prediction is an. estimate of future events and trends in a
subjective manner without taking into account the past data.
The subjective considerations may not emerge from any
predetermined analysis or approach.
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Why systematic analysis of market & demand?
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Market and demand analysis of various types are undertaken
to meet specific requirements of planning and decision
For example, short-term decisions in production planning,
distribution etc and selling individual products would require
short-term forecast, upto one year time horizon, which must
be fairly accurate for specific product items.
For long-term planning, time horizon being four to five years,
information required from demand analysis would be for
broad product groups for facilitating choice of technology,
machine tools and other hard-wares and their location. .
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Need for Forecasting?
All business planning starts with forecasting Capital
investment, like procurement of raw materials and production
planning, has to relate to demand forecasting.
High volume high technology mass production systems have
further high-lighted the importance of accurate demand
Even in a batch type production, any major mismatch
between forecast and manufacture will lead to higher capital
tied up in finished products which are slow in selling.
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a. Situation analysis framework (SAF) is an analytical and
planning method commonly used in PRCA and
communication programme planning and implementation.
SAF is adapted from the Logical Framework Approach (LFA)
and the Objective Oriented Project Planning (OOPP).
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Situational Analysis
Participatory Rural Communication Appraisal
1. Preliminary assessment of the situation, as perceived by planners and
project management, of an on-going project to provide a common framework
for identifying and understanding the project's goal, problems, objectives and
beneficiaries. This is done before the PRCA in order to have a better picture of
the current situation of the project.

2. During field PRCA, SAF, especially the problem tree, is used in a participatory
manner with the project beneficiaries to identify and carry out a cause-effect
analysis of the main problems the project is addressing in the community. This
exercise helps in the identification and selection of the priority focal problems
the communication strategy will address.

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SAF is therefore an analytical and organizational technique that
can facilitate the whole communication strategy design process.
It is particularly useful for the following specific phases of the
communication programme:
3. During communication strategy design, SAF provides a
framework for the organization and management of the
various elements that form the strategy such as the
communication objectives, outputs, activities and inputs.

4. During the planning of the implementation phase of the
communication programme, SAF provides the framework for
identifying and incorporating indicators for the monitoring
and evaluation of the programme
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The major components of SAF are the following:
Stakeholders (traditionally referred to as beneficiaries): These are the people the
project is trying to involve and assist through its activities. As the term implies
stakeholders are those people in the rural communities who have a specific interest in
solving the problem or improving the situation.
Development problem: Also sometimes labelled the grand-problem, this defines a
major undesired and negative situation affecting a large number of people. Projects are
normally formulated as ways of reducing specific aspects of a development problem.
Thus, a development problem can include a number of different problems and issues
being tackled by various projects.
Project goal: This is a statement of the overall aim of the project. It describes what the
project aims to achieve by addressing the development problem. The goal provides the
overall justification for the very existence of the project. It is also called the aim or
development objective.
Main problems: These are major specific problems or the undesired situation the
project is specifically addressing. Main problems are derived from the development
problem. They are the major causes of the development problem, or issues related to
it. The definition of the main problems provides the boundaries within which the
project can act..

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Project objectives: Also known as immediate objectives, these indicate what the
project aims to specifically accomplish in relation to the main problems and as a
contribution to the achievement of the project goal.
The problem tree: This important tool assists in the cause-effect analysis of a
situation. The problem tree is the starting point of SAF as all the other components
of the framework are derived from it. The rationale and how to develop a problem
tree will be discussed in greater detail in the next section and in the Toolbox.
Focal problems: Often referred to as root-problems, these are factors causing part
or most of the main problem. This handbook will concentrate only on those focal
problems that can be directly solved through a communication intervention. In
order to identify focal problems it is necessary to carry out a cause-effect analysis
of the situation, usually starting from the main problem. Focal problems are
derived through the drawing and analysis of the problem tree.
Communication objectives: These indicate what the communication intervention
aims to accomplish, specifically in relation to the focal problem and as a
contribution to the achievement of the project goal. The communication
objectives are derived from the problem tree by rewording the focal problems as
desirable states and/or as solution- oriented statements. Each communication
objective should be expressed in a SMART manner with a specific timeframe for its

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Objectives of market and demand analysis for a product/service:

Who are buyers?
Total current demand?
Distribution of demand temporally and geographically?
Break-up of demand?
Customers willingness to pay?
Potential customers and quality of product?
Price and warranty?
Prospects of immediate sales?

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Secondary Information Collection
Data can be obtained from many different sources.

However, it is conventional - and useful for the present
purpose - to divide these into two main categories: primary
and secondary.

Primary data is data which is collected for the particular
planning purpose in question, while secondary data is that
which has already been collected (either for a previous
planning exercise or as part of a general data collection
programme) and is merely utilized for the present planning
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Secondary data may take many forms and its quality and value for rural
area planning varies greatly. In some countries, districts are encouraged to
maintain a 'store' of basic secondary data about the district which can be
used as and when needed for planning purposes.

In order to be effective, such a store should be kept in a central place, such
as a planning office or conference room, and it should be up-dated
regularly. In many countries, no such store exists and it is therefore
necessary to collect the secondary data individually for each planning

However, in such cases, it is advisable for those involved in planning on a
regular basis to familiarize themselves with the kinds of secondary data
available so that they know where to go when the need arises.
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Sources and Types
Demographic data is data on the size and structure of a population,
including the total population, household size, distribution by age and sex,
past and future rates of growth, fertility and mortality, migration and
population density.
In many countries sample agricultural household surveys are undertaken
at regular intervals, by either the ministry responsible for agriculture or a
national statistical agency, to produce basic data on the volume and
methods of agricultural production.
Official government records.
Maps are a very useful way of presenting data for district planning,
especially as a means of conveying information or stimulating discussion
at meetings of civil servants, local politicians and/or the general public.
Economic surveys, budget reports, annual reports, white paper etc.

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Market Planning
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Key Words
Situational analysis
Secondary information collection
Demand forecasting
Market planning

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