CHAPTER ONE

GENERAL
INTRODUCTION (AN
OVERVIEW OF THE
FIELD OF PROJECT
PLANNING & CAPITAL
BUDGETING)
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Sewale Abate (Ph.D)

Introduction
The government of Ethiopia is planning to:
Construct the great renaissance dam,
Thinking of an ambitious plan to construct
railways and road to connect all kebeles and
woredas to the main high way in recent years.
All these situations involve a capital expenditure
decision.
Essentially, each of them represents a scheme for
investing resources which can be analysed and
appraised reasonably independently
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Cont.
The basic characteristic of a capital
expenditure (also referred to as a capital
investment or capital project or just project) is
that:
it typically involves a current outlay (or
current outlay and future outlays) of funds in
the expectation of a stream of benefit
extending far into the future.

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Sewale Abate (Ph.D)

Meaning and definition of

project
What is a project?
There is no one comprehensive definition for a
project.
Its definition varies from author to author,
from organization to organization, and based
on the nature, objective and other
characteristics of the project.
As a result you may find several definitions of a
project in the literature.
some of which are provided below.
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Cont.
A project is any scheme or part of scheme for
investing resources, which can be reasonably
analyzed and evaluated as independent unit
(Little and Mirrlees, 1974).
In relation to agricultural activities, Gittinger
(1982) defined project as a whole complex of
activities in an undertaking that involves uses of
resources to gain benefits.

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Cont
A project is an organized effort to do
something useful or attain a useful end result
which is sometimes defined as a plan, venture
or enterprise (Angus and Norman, 1997).
A project is a temporary endeavor
undertaken to create a unique
product, service or result (PMI,
2004).

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Sewale Abate (Ph.D)

Cont.
Project is a temporary organization to which
resources are assigned to undertake a unique,
novel and transient endeavor managing the
inherent uncertainty and need for integration in
order to deliver beneficial objectives of change
(Turner and Mller, 2003).
Project is a unique process intended
to achieve target outcomes (Zwikael
and Smyrk, 2009).
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Cont..
A project is a finite endeavor--having
specific start and completion dates.
Undertaken to create a unique product
or
service
which
brings
about
beneficial change or added value.
This finite characteristic of projects
stands in sharp contrast to processes, or
operations, which are permanent or
semi-permanent functional work to
repetitively produce the same product
or service.
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Cont..
The world bank: defined it as an approval
of capital investment to develop facilities
to provide goods and services.
A major misconception about a project is
relating it to only construction or creation
of such physical facilities as buildings,
roads and dams.
However, project may involve intangible
things such as
creation of awareness (e.g. about HIV/AIDS),
eradication of diseases (e.g. polio
vaccination),
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Sewale Abate (Ph.D)

Cont
combating harmful practices (e.g. genital
mutilation) and
capacity building (e.g. training to enhance
service delivery capabilities of public sector
employees).
Thus, projects may range from:
physical or technical (construction of
physical facilities) to
mixed (involving both physical and
nonphysical things) to
nonphysical (dealing purely with behavioral
aspects of an organization).

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10

Cont..
A project is defined as one shot, time
tested, goal directed, major
undertaking requiring the
commitment of varied skills and
resources.
A project also described as a
combination of human and non human
resources pulled together in a
temporary organization to achieve a
specified purpose.
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Cont
A project has a single set of
objectives.
A project has a finite and well
defined life span.
A project is an investment made on a
package of interrelated time-bound
activities.

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Cont..
Every project has two phases basically;
the first is preparation and construction
and
the second its operation.

Project planning deals with specified

tasks, operations, and activities which
must be preformed to achieve the
project goals.
It has to be operated with in a given set
of rules, regulations, constraints and
restrictions.
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Cont.
Every project converts the given
inputs in to outputs through the
process on implementation.
Therefore, a project can be defined as a
complex of non-routine activities
that must be completed with a set
amount of resources and within a
set time limit.

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Cont
A project can also considered to be any
a series of activities and tasks that:
Have a specific objective to be
completed within certain specifications
Have defined start and end dates
Have funding limits
Consume scarce resources (i.e.
financial, human, and materials
resources).
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Cont..
A Project can also defined as an entire
set of activities involved in:
conceiving,
planning,
appraising,
implementing,
monitoring, and
evaluating

an economic or social undertaking which

involves the employment of scarce
resources to create products or
services.
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Cont.
Regardless of its type and complexity,
a project can be more explained in
terms of its characteristics.

What are the unique

characteristics of a project
which distinguish it from other
organizations and their
ongoing activities?

DISCUSSI
ON

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Features of a project
(Distinguishing characteristics of
a project)
According to Turner and Mller
(2003), PMBOK (2004) and Nicholas
and Steyn (2008), the following
features characterize a project:
1. Temporary Project is not a going
concern. It rather is a one-time nonroutine activity that has a definite
beginning and a definite end.
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Cont.
2. Unique Projects are said to be as unique
as fingerprints.
A project is considered to be a unique
endeavour in various terms including its
size, complexity, duration, timing,
location, stakeholders, design,
objective and other several variables
3. Resources Project involves different
resources drawn from different functions,
organizations and professions that cross
beyond the ordinary boundaries of an
organization and its functional units .
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Cont.
4. Beneficial changes Turner (2006b)
stated that a project is meant to
produce an output which in its turn is
meant to help its owner to achieve
beneficial outcome.
A key point to note in relation to
project goals is that they should be
stated in a way that facilitates
measurement of achievements.
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Cont..
The general rule is that project goals
should be SMART an acronym for:
Specific well defined and clear to
anyone that has a basic knowledge of
the project,
Measurable how do we know how far
away completion is and when it has
been achieved,
Action-oriented indicate what
should be done to achieve the
objective,
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Cont..
Reliable/achievable do we have the
resources (human, financial, material,
information, time) to make the goal
happen? Is the objective achievable with
the available resources and timeframe,
and
Time-based it should identify a
definite target date for completion
and/or frequencies for specific action
steps that are important for achieving
the goal on/within a specific time period.
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Purposes and roles of

projects

Why do organizations undertake

projects?

Maximize the wealth

Improve the living standards of citizens.

Project is instruments or tools of

implementing development policies
and programs to bring development
and growth to a national and its
citizens.
So project is considered as a means of
realizing development objectives.
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Cont.
Besides, regardless of whether they are
from the public or private sector, projects
play key roles in national development.
They:
1.are catalyst agents of economic
development,
2.Create employment opportunities
3.Enhance the supply of goods and services
and lead to self-reliance.
4.Support foreign currency earnings and
improve balance of payment
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Cont.
5. Serve as means of distributing national
income e.g. imagine the number of
projects in progress and completed in the
less developed areas of the country.
6. They also initiate development of basic
infrastructure and environment.
7. Project identification brings the necessary
change in society in course of time
8. Project accelerates the process of sociocultural development
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Projects and capital

budgeting

What is Capital expenditures ?

Capital expenditure refers to resources an
organization commits to create physical
and/or non-physical assets and capabilities
from which a stream of benefits is
expected.
Capital expenditure decision often
represents the most important decision
in an organization.
Its importance stems from the following
three inter-related reasons:
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Cont..
1.
2.
3.

Long term effects

Irreversibility
Substantial outlay
Besides, capital expenditure decision
poses difficulties arising from the
following three principal sources:
1. Temporal spread (problem in
estimating costs & benefits)
2. Uncertainty
3. Measurement problems
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Cont.
The relationship between projects and
capital expenditures is that projects, as
means of creating physical and non-physical
assets and capabilities involve capital
expenditures.
What is Capital budgeting ?
Capital budgeting refers to a long-term
planning for making and financing
investments that involve capital
expenditures and that affect financial and
operating results of an organization for
relatively long time
period
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Cont
According to Baker and Powell (2005), the
capital budgeting process involves six
stages:
i. identify investment options
ii.estimate cash flows
iii.evaluate each investment option
iv.select and approve the appropriate
investment option
v.implement the approved investment
option
vi. perform a post-completion audit
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Figure-1.1 An integrated
view of capital budgeting
process

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Project planning and

analysis

It is a detailed examination of viability

of a project in terms of such variables
as:
commercial,
technical,
environmental,
financial and social.

It is meant to provide information

needed by decision makers to reach at
an informed and rational choice of
projects for implementation.
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Importance of Project planning

& analysis

Comprehensive development programs at

national level are composed of a variety
of projects.
For the success of development goals ,
projects at micro-level are found to be
both feasible and desirable.
The basic economic problem facing all
countries is that of allocating limited
resources to a variety of different uses
in such a way that the net benefit to the
society is as large as possible
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CONT.
The same justification applies to project
planning and analysis in the private
sector.
All business organizations face problem
of allocating their scarce resource to
available alternative projects.
Project planning and analysis help them
to select the alternative that will bring
more benefits than costs that is the
project that maximizes return to its
shareholders.
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CONT.
If project benefits exceed costs,
measured by a common yardstick, the
project is acceptable,
If not, the project should be rejected.
Thus, the importance of project
planning and analysis rests on:
1) desirable and feasible projects,
2) allocate scarce resources
3)Cost benefit analysis
4)Convert in to a common yardstick
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Project Plan
A project plan is "A formal, approved
document used to guide both project
execution and project control.
The primary uses of the project plan are to :
document planning assumptions and decisions
facilitate communication among stakeholders &
document approved scope, cost, and schedule.

is alternatively defined as a statement of

how & when a project's objectives are to
be achieved, by showing the major
products, activities and resources required
on the project.
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Cont

At a minimum, a project plan answers

basic questions about the project like:
Why? - What is the problem or value
proposition addressed by the project?
Why is it being sponsored?
What? - What is the work that will be
performed on the project? What are the
major products/deliverables?
Who? - Who will be involved and what
will be their responsibilities within the
project? How will they be organized?
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Cont.

When? - What is the project timeline

and when will particularly meaningful
points, referred to as milestones, be
complete?

Project Planning
Project planning is part of project
management, which relates to the use
of schedules such as Gantt charts to
plan and subsequently report progress
within the project environment.
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What is Gantt chart?

A Gantt chart is a horizontal bar chart
developed as a production control tool
in 1917 by Henry L. Gantt, an
American engineer and social scientist.
Frequently used in project
management.
A Gantt chart provides a graphical
illustration of a schedule that helps to
plan, coordinate, and track specific
tasks in a project.
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Gantt cgart

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TO BE CONTINUED

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