A complete class notes Of

Project Management
(BEG494MS)
B.E
Electronics & communication
VII Semester
Presented by:
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Syllabus:
Year: IV

PROJECT MANAGEMENT BEG494MS

Semester: I
Examination Scheme

Teaching Schedule
Hour/week

Theory
3

Tutorial
0

Practical
1

Internal Assessment
Theory Practical*
20
-

Final
Theory**
80

Practical

Total
100

( 8 hours)
4.1
Definition of M&E.
4.2
Method and Technology in M&E.
4.3
Technique in formulating monitoring indicators.
4.4
Controlling systems.
4.5
Project control cycle.
4.6
Feedback control system.
4.7
Cost control
4.8
Work breakdown structure.
4.9
Project management information system.
5. Capital Planning and Budgeting
(10 hours)
5.1
Capital Planning Procedure.
5.2
Operating and Capital budget.
5.3
Fixed and Flexible budge.
5.4
Revision of budget
5.5
Budget control method (Audit)
6.
Impact Analysys
6.1
Social Impact Analysis.
6.2
Environmental Impact Analysis.
6.3
Economic Impact Analysis.
References:
1. Arnold M. Ruskin and W.Eugene Estes. Project Management.
Marcel Dekker Publishers. 1982.
2. Joseph J. Moder and Cecil R.Philips. Project Management
with CPM and PERT. Van Nostrand Reinhold Publishers.
Latest edition.
3. LS. Srinath. PERT and Application. East-west press.
4. A. Bhattacharya and S.K Sorkhel. Management by Network
Analysis. The Institutions of Engineers. India.
5. Prasanna Chandra. Projects: Preparation. Appraisal.
Implementation. Tata Mc Graw Hill Publishing Company Ltd.
New Delhi.

Course Objective: To provide students with fundamental principles

and basic tools and methodology of initiating, planning, scheduling and
controlling of the projects.
1. Introduction
(3 hours)
1.1
Project definition.
1.2
Project Cycles, Project Phases.
1.3
Setting of Project Objectives and Goals.
2. Pre Project work:
(2 hours)
2.1
Feasibility Study.
2.2
Project Appraisal.
2.3
Project Proposal.
3. Project Planning:
(18 Hours)
3.1
Definition.
3.2
Planning Function.
3.3
Network models CPM/PERT
3.4
Goal Oriented Project Planning (ZOPP planning)
3.5
Project Scheduling with limited resources.
3.6
Wiests Algorithm.
3.7
Manpower leveling.
3.8
Materials scheduling.
3.9
Multi project scheduling
3.10 Mathematical programming for minimum cost or maximum
project return.
3.11 Plan of operation and its different forms of presentation.
4.
Project Monitoring and Evaluation (M&E) and Control.
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Chapter- 1
PROJECT MANAGEMENT
I.

Project Definition : (Projects are for development )

Key word or Phrase, used to define Project:
a) One -time -only set activities
b) Specific objectives
c) Definite starting and ending point
d) Life cycle
e) Unique product or service as an output
f) Specific group of benificeries
g) Operates within the constraints of time, cost and
quality performance

1. As per (Gittimager, 1985) :

A project is as investment activity in which financial
resources are extended to create capital assets that produce
benifits over extended period of time.
2. According to Project Management Institute of USA:
A project is a temporary end over undertaken to create a
unique Product or Service.
3. According to Harold Kerzner :
A project is any series of activities or tasks that;
i) have specific objectives to be completed within
certain specifications
ii) have defined start and end task
iii) have funding limits
iv) consume resources
4. According to S. Chaudhary:

A project starts from scratch with a definite mission,

generates activities involving a variety of human and nonhuman resources all directed towards fulfillment of the
mission and stops once the mission is fulfilled.
5. According to Trevor L. Young :
A Project is a collection of linked activities, carried out in
an organized manner with a clearly defined start point and
finish point to achieve some specific results, that satisfy the
needs of an organization as derived from the current business
plan.
Based on the above definitions of different writers we can
define the project as below :
A project is an one-time-only set activities designed to
attain:
specific objectives within the constraints of time, cost
and quality performance in dynamic environment
through the planning use and control of a variety of
resources
To create a unique product or service within temporary
life span
A project is an one-time-only set development activity
which has
Specific objectives
Constraints of time, cost and quality performance
Unique products or service as an output
Life cycle (born and die)
Specific group of beneficiaries

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Types of Project:
Projects are of different types:
a) Research and Development Projects
b) Construction Projects i.e. Engineering Project
c) Manufacturing of Aeroplanes, Vehicles etc.
d) Software and website development Project
e) Production of movies
f)
Advertisement Campaign
g) Education and Awareness Campaign
h) Training Programs
i)
Book Writing
j)
Course Manuals
k) Developing new services etc.

Project Schedule constraints time i.e. it sets deadline

Project Budget sets cost limits
Project Specification sets quality performance
4.

Unique:
Each Project is different

5.

Team Work:
Project is implemented through team members from
different discipline and experiences. The Project Manager
is the leader of the team.

6.

Flexibility:
The Project operates in dynamic environment. And so it
needs flexibility to response changing environment.

7.

Resources Integration:
Integration of physical, financial, human and information
resources is the must in Project. Project Manager is one
who integrates these resources with minimum waste in the
Project.

8.

Planning and Control:

Project requires effective and efficient planning and
control systems. Standards of the project activities are set
through Planning. These standards are the yardsticks to
measure project performance.
Contracting, Sub-Contracting
Most Projects are contract based.
Beneficeries:

Characteristics of the Project:

1.

Specific Objectives:

2.

Project must clearly define its objectives. Without

objectives the Project can not be thinked out.
Life Span:

3.

Each Project has its own life span. As we said before, the
Project is an one-time-only set activities. It has beginning
and end. The life span of the Project depends upon the
nature. Based on the nature of the Projects, some has long
life span and some has short.
Constraints:
All Projects have constraints. Project operates within the
constraints of time, cost, and quality performance.

9.
10.

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All projects have beneficeries. Benificeries are those, who

use the Project out put.
Formulating Vission/ Mission/Goal:
Vision is the dream, an ideal end- result.
Mission is a means to attain the vision
Goals
are means to attain the mission

i) Construct about 25,000 sq/ft floor area of main building ,

where required class rooms, laboratories, library and room
for management will be managed.
ii) Construct Laboratory sheds of about 3000 sq/ft floor area
iii) Construct Basket ball court, Volley ball court etc.

Definition of Objectives:
Objectives are the desired outcomes or end result of the
Project.
Objectives are the results to be achieved. They are the end
result.
Goals: General statement of desired outcome, common to the
whole system/ subsystem of an organization.
Objectives: Specific and goal-oriented may be different for
various Projects of the organization.
Project goals and Objectives should be smart:
S- pecific
M-easurable
A-ttainable
R-ealistic/ esult oriented / resource-based
T-ime - bounded
1. The overall goal of the Complex Development Project of
Acme Engineering College is to provide minimum physical
facilities required in teaching-learning process.
2. The objectives of the Complex Development Project of
Acme Engineering College is to

Project Life Cycle:

We have already mentioned that the project has its own
life. It has beginning and end points. It has fixed life span. The
life span of the Project is divided into different phases.
Cleland divides the Project life cycle into following five different
phases:
i) Conceptual : Preliminary evaluation of Project Idea,
identification of needs.
ii) Definitions : Identification of the resources requirement
and the establishment of time, cost, performance
parameters
iii) Production : standardization of efforts and completion of
documentation, for operations; Project Implementation
iv) Operational: Evaluation of the Project and its integration
into another organization
v) Divestment : Reallocation of resources to other Project

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Most commonly, the following four phases are described in the

life cycle of the Project.
a)
Formulation Phase
b)
Planning Phase
c)
Implementation Phase
d)
Termination Phase
1)
Project Formulation Phase:
This is conception phase. The basic task in this phase
consists of the following:
i)
Project Identification:
Project are born with creative ideas. The creative
ideas come from different situation :
Environment : what is the political situation, socio
cultural, economic, legal and technological forces in the
respective environment are analysed.
Internal Resources of the Organization: VMG of the
organization, plan & strategy adopted by the organization
and SWOT analysis etc. provide new Project idea.
External Resources: Market demand, donors priority, legal
provision, Competators' activities and vested interest of
the politician provide Project idea.
ii)

Project Formulation:
Two major activities are implemented during Project
Formulation:
a) Statement of work: Different parameters like scope
& objectives of the project, role & responsibilities
of project implementers; schedule, cost and quality
of the Project etc are incorporated in statement of
work.

b) Project Proposal: Technical & Financial Proposal

used for the bidding are the product of project
proposal. Project proposal is an initial stage of
project document which is formed after conducting
prefeasibility study and preliminary design of the
Project.
2)
Planning Phase (Project Development Phase) :
Preparing of detailed plan, with, time, cost, and quality. The
following are the three major activities, that are implemented
during this phase:
Feasibility study:
Implemenatalility of the Project is analysed in this study.
The areas of analysis could be:
i)
Market analysis
ii)
Technical Analysis - Technically viable or not
iii) Financial Analysis
iv) Management Analysis
v)
Economic Analysis
vi) Environment Analysis
Appraisal:

Ability of the project to achieve its objectives.

Comparability of the Project with other project in

term of investment, cost/benefits , job creation
profit etc.
Project Approval
Finalization of funding proposals, agreement and
contract document

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1.2
1.3
1.4

3)

4)

Allocation of the resources to the Project,

introduction of appropriate rule & regulation for the
Project
Design:

Preparation of blue prints and specification

Preparation of detail implementation plan

Implementation Phase:
Implementation
Mobilization

Project organization is set

Project team is formed and implementation is

carried out through this team

Project manager is the team leader and is

responsible to mobilize the Project activities

MIS is developed
Control:
CPM
PERT
Program Evaluation and Review Technique
Termination Phase

Project Evaluation

Project Handover

Project Environment:
Project Environment is classified into following three:
1. Internal Environment
2. Task Environment
3. External Environment
1.

Internal Environment
1.1 Project Objectives

Constraints
Structure
Resources

2.

Task Environment
It surrounds the Project and made up of different
stakeholders. It does not control but influences the project
2.1 Customer
2.2 Contractors
2.3 Consultants
2.4 Suppliers
2.5 Government
2.6 Financiers
2.7 Competitors
2.8 Labour Union

3.

External Environment
Elements of External Environment are PEST
# Political-legal (P)
# Economic (E)
# Socio-cultural (S)
# Technological (T)

3.1 Political-legal
a. Political Environment:
#
Political System
#
Political Institutions
#
Political Philosophies
b. Legal Environment:
#
Laws
#
Courts of Law

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#
3.2

Law Administrators

Economic
#
Economic System ( Free Market Economy,
Centrally Planned and Mixed Economy)
#
Economic Policies ( Monetary Policy,
Fiscal Policy and Industrial Policy)
#
Economic Condition (Income, Business Cycle,
Inflation and Stage of Economic Development)
#
Regional
Economic
Groups
(SAARC,
ASEAN, EU etc.

3.3 Socio- Cultural

a. Social Environment:
#
Demographics (Size, Distribution and Growth of
Population, Age Mix of Population, Migration)
#
Social Institutions (Reference Groups,
Social Class)
#
Pressure Groups (Political parties, Human
Rights and Women Rights Group)
#
Social Change
b. Cultural Environment
3.4

Technological
#
Level of Technology (Labour-Based or Capital
Based Technology)
#
Pace of Technological Change
#
Technology Transfer ( Globalization, Turn key
Projects, Trade, Technical Assistance, Training)
#
Research and Development Budget

Chapter: 2
Feasibility Study
Feasibility Study is the process of determining the projects
implementability. It asks the following questions:
#
Will it work? Can it be improved?
#
Is there a better way? Is it worthy?
The feasibility study covers the following:
a.
Technical Analysis
b.
Economic Analysis
c.
Marketing Analysis
d.
Management Analysis
e.
Env. Analysis

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#
Market Demand (National and International)
#
Sales Forecast and Estimated Revenue
#
Marketing Program (Price, Distribution etc.)
#
Market Coverage of the Project
#
Quality Specifications
#
Competitive Factors, (Existing Competitors)
It is very important aspects of the Feasibility Study. The most of
the project in developing countries fail due to marketing
problems.

a.
Technical Analysis
Technical Analysis covers the following:
#
Choice of available technologies
#
Design Requirements
#
Human Resource Requirement
#
Size, Location and Geology
#
Technical Risk
b. Economic Analysis

It studies the economic viability of the project.

*
Cost-Benefit Analysis (CBA) is used to assess
the overall impact of the project
#
For a privately owned project CBA examines
profitability, i.e., projects ability to earn profit.
#
For publicly owned project, CBA analyses social
profitability in terms of contribution to
the
national economy : Poverty Reduction, Employment
Generation, Social Development and Economic
Growth.
#
The project with the best CBA is
feasible project.
#
The following techniques are used to
calculate cost benefits:
*
Cost Benefit Ratio
*
Net Present Value
*
Internal
Rate
of
Return c. Marketing Analysis
It studies the marketing viability of the project, the areas of focus
of which are:
#
Availability of Raw materials

d.
Management Analysis
It studies the institutional viability I.e. the capacity of the
organization to direct and control the project.
The areas of the focus in this analysis are:
#
Institutional Relationship
#
Project Organization
#
Project Management
#
Stakeholders Analysis
e. Environmental Analysis
It studies the impact of the project in environment. The focus
areas of this analysis are:
#
Environmental Suitability (The capacity of the
environment to support the project).
#
Environmental Impact (The impact of the project
activities in the environment like pollution, soil
erosion, damage to flora and fauna).
Each government has its own guideline for Environment Impact
Assessment(EIA), which covers the following:
i)
Ecological: Impact in flora and fauna
ii)
Physical: Impact on quality of air, water

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iii)
iv)
v)

Aesthetic: Impact in beauty

Social: Impact in society. For this SIA is done.
Ecological Relationship: impact on food chain

f. Financial Analysis
It studies the financial sustainability of the project. The area of
focus are:
i)
Capital Requirement
ii)
Sources of fund
iii) Projected Cash Flow
iv) Accounting and Reporting System
vi) Project Profitability

Feasibility Study: A schematic Diagram

Generation of Idea
Initial Screening
Is the idea appropriate
Yes
No Terminate
Plan Feasibility Study
Conduct Market Analysis

Conduct Technical Analysis

Conduct Financial Analysis

Conduct Economic and Ecological Analysis

Key Issue in Feasibility Study

Is the Project Worthwhile

Prepare funding Proposal

Potential Market
Market Analysis

n
o

Terminate

Market Share
Project Appraisal

Technical Analysis

Technical Viability
Sensible Choices

Financial Analysis
Economic Analysis
Environment Analysis

Risk and Return

CBA and other impact
Environmental Damage
Restoration Measure

It is evaluation of projects ability to succeed. It is based on the

findings of the feasibility analysis. It addresses;
* Ability of the project to achieve its objective.
* Comparability of the project with other projects in term
of investment, cost-benefit, job creation, profit etc.
Donors generally send mission for project Appraisal.
Appraisal should be done systematically to provide an overall
assessment of the projects likelihood for success. It answers the
following questions;

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 Will the project as designed meet its objective?

The primary function of appraisal is to evaluate a projects
ability to achieve its objectives. For private project, the
objective might be profitability where as for public project
it might be socio-economic development.

Project budget
Monitoring & Evaluation process
Chapter: 3
Project planning:

Project Proposal
The set of documents submitted sowing how the target will be
met is called project proposal.It is blueprint of project activities.
It describes organizations capacity to carry out project work. It
also indicates the cost of the project. Generally, it deals with two
parts;
* Technical
* Financial
Procedure for developing Project Proposal

Project brief--- need, objective, benefit

Feasibility study
Preliminary design
Proposal development

The Project proposal should contain following informations;

Project objective
Project activities
Execution process
Project Schedule

Planning: Planning is thinking ahead. Planning is a management

activity and a continuous process, where the following analysis
is carried out:
1.
Where are we now?
2.
Where to go?
3.
What goals and objectives are to be set?
4.
How to select best method?
5
What is to be done?
6
When it is to be done?
7
People Responsible!
8
How it is to be done?
9
Identifying resources and persons to be
consulted.
Planning is deciding in advance about what to do, How to do it,
when to do it and who is to do it. It provides the ends to be
achieved.
-Stephen P. Robbins
Planning is the process by which managers define goals and
take necessary steps to ensure that these goals are achieved.
-Richard Steers
Steps in Planning Process
1.
SWOT Analysis

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2.
3.
4.
5.
6.
7.

Set Goals
Develop premises
Determine and evaluate alternatives.
Select course of Action
Formulate Action Plan
Prepare Budget

Elements of Planning
Vision.
Mission.
Goals.
Objectives
Strategies.
Monitoring.
Measuring.
Analysis.
Re-planning.
Planning Skills:
A. Task Related Skills
Prioritizing
Setting objectives and targets
Time management
Scheduling
Developing contingencies plans
Analyzing
Synthesizing
Decision making

B. People Related Skills

Communication
Involving
Supporting
Gaining commitment
Delegating
Listening
Project Planning is deciding in advance about:
*
What are the activities to be done?
*
How these activities will be done?
*
When these activities will be done?
*
Who will do these activities?
Project Planning is the process of thinking through and making
explicit the projects objectives, goals and strategy necessary to
bring the project through its life cycle to successful termination.
David I. cleland
Purpose of the Project Planning
1. Control risks and uncertainty in the project environment
2. Allocate resources in coordinated manner.
3. Establish performance standard.
4. Provide procedure of project execution
5. Establish system of correction
6. Ensure the project completion in time within the allocated
budget and as per quality performance.
7. Improve efficiency and minimize waste
Project Planning Process
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It consists of the following steps:

1.
Understand the project objective
2.
Identify key project stages
3.
Prepare Work break down Structure
4.
Determine logical sequence of the activities
5.
Estimate time and resource requirements.
6.
Allocate responsibility for each activity
7.
Finalize project plan

2.

Remember:
KEEP CONFIDENCE
TRUST OTHERS
NEVER LOOSE HOPE
3.

Planning Function:
1. Introduction:
# One of the most important responsibility of the project
manager is planning. Almost all projects require formal
and detailed planning.
# Planning function involves the selection of the
objectives and establishing the policies, procedures and
program necessary to achieve them.
# The project planning must be systematic, flexible,
disciplined and capable to accept multifunctional inputs.
# One of the objectives of project planning is to identify
all works to make aware to all project participants.
There are four basic reasons for project planning:
*
To eliminate or reduce uncertainty.
*
To improve efficiency of the operation.

*
To obtain better understanding of the
objectives.
*
To provide a basis for monitoring and
controlling work.
Nine major components of Planning
i.
Objectives setting.
ii.
Strategy to be followed.
iii. Scheduling.
iv.
Budgeting.
v.
Forecast.
vi.
Organization.
vii. Policy
viii. Procedure
ix.
Standard.
Project Graphics
paper
# The project plan should be reflected in the
in such a way that every one can easily
understand.
Graphics are the easiest means for
communicating
information.
# Planning is also the means of control and basic control
parameters in the project are time,
cost
and
performance, the graphical
presentation
of
the
planning should incorporate all these parameters and
their relationship.
# Graphical displays of the planning are the prime means
of tracking cost, schedule and performance. `Proper
graphical display can result in:
*
Cutting project cost and reducing time scale.
*
Coordinating Planning
*
Eliminating idle time

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Obtaining better scheduling and control of

contractor activities
*
Developing better troubleshooting procedure.
*
Cutting time for routine decisions, but
allowing more time for decision making.
Bar (Gantt) Chart
#
In early 1900s Henry Gantt first utilized it.
#
It is the most common type of display.
#
It is a means of displaying simple activities and
events
plotted against time or cost.
#
Bar chart are used to exhibit program progress and
specific work required to accomplish to get
objectives. Bar Charts often include the following:
*
Listing of activities
*
Duration of activity
*
Schedule dates
*
Progress to date
Types of Bar Chart
i. Bar Chart for single Activities
ii. Grouped Bar Chart for performance
Comparison
iii. Direct and Indirect Materials and Labour cost break
down for all Programs per year
iv. Quantitative Pictorial Bar Chart.

#
#

2. Historical background of PERT/CPM

# PERT was created as a means to plan and accelerate the
development of polaris Ballistic Missiles.
# The special project office of US Navy has introduced
PERT to plan the missile development as quick as
possible.
# PERT as a planning, scheduling and control technique
came into existence to answer the following questions.
a) What research has to be done to accomplish the
missile development and how should it be planned?
b) How long would the research take place?
c) What stages of the development and testing would
be necessary for the missiles completion?
d) How fast could the country do it?
e) In summary, when could the United States expect to
have an operational polaris missile?
3. Planning scheduling and control:
#

Network Models CPM/PERT

1. Introduction:
# Network models are the control techniques of the project.

PERT and CPM are the network models used for planning,
scheduling and control of the project.
PERT and CPM were originally developed in 1958/59 to
meet the needs of Age of Massive Engineers where
traditional method like Gantt charts were inapplicable.

planning involves listing of tasks or jobs to be performed;

materials, equipments and manpower requirements are
analyzed and estimate of costs and duration for different
jobs are made.
Scheduling is the laying out of the actual jobs of the
project in time order in which they have to be performed.

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Control is the managerial function, which reviews the

difference between schedule and actual performance.

4. Basic Concept of PERT and CPM:

a) Events : It is starting or ending point for a group of activities.
The circles represent Events.
b) Activity: It is the work required to proceed form one event
or point to in time to another. Arrow represent
activities.
c) Predecessors: It is an activity which is required to finish to
start next
d) Successor: It is an activity, which can be started only after
the completion of previous activity.
e) Dummy Activity: It is an activity which does not consume
time or resources.
f) Critical Path: It is longest path or sequence of connected
activities. Its length determines the duration of the
project.
5. Steps in PERT:
a) Identifying of different activities including dummy
activities needed to complete the project.
b) Identification of the sequence of the activities
implementation through diagram.
2
c)
4

Finalize the time requirement to accomplish each activity.

Generally two time estimate (EST and LST) is prepared.
d) Connect all activities in sequential order to form a network.
6. PERT provides answer to the following:
a) Finish time of the project.
b) Start and finish time of the each individual activity of the
project.
c) Activities that needed to be done first before starting others.
d) Possibilities of shifting resources from non-critical activities
to critical activities.
e) Activities that need concentration of management effort at
one time.
f) Uncertainty reduction in a project.
7. PERT Conventions:
a) Two events connected by one activity .
A
1

b) Activity A must be completed to start B.

A

c) Activity A must be completed before to start B and C.

3
B
A
1

2
C

3
5

d) Activity C can not be stated until both A and B are

completed.
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network. For this discussion, we will use the original form

of activity on arc.

A
3

C
4

The following is a very simple example of a PERT diagram:

e) C and D can not be stared until both A and B are

completed.
1

B
A

4
A

B
2

7
3

Objective of Network models:

The main objectives of network models are to
Define the activities to be done in the project.
Integrate the activities in a logical time sequence.
Dynamic control over the progress of the project plan.
PERT:Programme Evaluation and Review Technique
#
The Program Evaluation and Review Technique (PERT) is
a network model that allows for randomness in activity
completion times.
#
PERT was developed in the late 1950's for the U.S. Navy's
Polaris project having thousands of contractors. It has the
potential to reduce both the time and cost required to
complete a project.
#
PERT originally was an activity on arc network, in which
the activities are represented on the lines . Over time,
some people began to use PERT as an activity on node

14
G

C
8

10

6
F

D
5

Steps in the PERT Planning Process

Identify the specific activities .
Determine the proper sequence of the activities.
Construct a network diagram.
Estimate the time required for each activity.
Determine the critical path.
Update the PERT chart as the project progresses
Benefits of PERT
PERT is useful because it provides the following information:
Expected project completion time.
Probability of completion before a specified date.
The critical path activities that directly impact the
completion time.
The activities that have slack time and that can lend
resources to critical path activities.
Activity start and end dates.
PERT Limitations

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The following are some of PERT's weaknesses:

The activity time estimates are somewhat subjective and
depend on judgment. In cases where there is little
experience in performing an activity, the numbers may be
only a guess. In other cases, if the person or group
performing the activity estimates the time there may be
bias in the estimate.
Even if the activity times are well-estimated, PERT
assumes a beta distribution for these time estimates, but
the actual distribution may be different.
Even if the beta distribution assumption holds, PERT
assumes that the probability distribution of the project
completion time is the same as that of the critical path.
Because other paths can become the critical path if their
associated activities are delayed, PERT consistently
underestimates the expected project completion time.
The underestimation of the project completion time due to
alternate paths becoming critical is perhaps the most
serious of these issues. To overcome this limitation, Monte
Carlo simulations can be performed on the network to
eliminate this optimistic bias in the expected project
completion time.
CPM:Critical Path Method
In 1957, DuPont developed a project management method
designed to address the challenge of shutting down chemical
plants for maintenance and then restarting the plants once the
maintenance had been completed. Given the complexity of the
process, they developed the Critical Path Method (CPM) for
managing such projects.

Benefit of CPM
CPM provides the following benefits:
Provides a graphical view of the project.
Predicts the time required to complete the project.
Shows which activities are critical to maintaining the
schedule and which are not.
#
CPM models the activities and events of a project as a
network. Activities are depicted as nodes on the network and
events that signify the beginning or ending of activities are
depicted as arcs or lines between the nodes.
The following is an example of a CPM network diagram:
A,2
start

D,3

finish

B,4

C,2

Steps in CPM Project Planning

Specify the individual activities.
Determine the sequence of those activities.
Draw a network diagram.
Estimate the completion time for each activity.
Identify the critical path (longest path through the
network)
Update the CPM diagram as the project progresses
CPM Limitations:

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CPM was developed for complex but fairly routine projects with
minimal uncertainty in the project completion times. For less
routine projects there is more uncertainty in the completion
times, and this uncertainty limits the usefulness of the
deterministic CPM model. An alternative to CPM is the PERT
project planning model, which allows a range of durations to be
specified for each activity.

2. The early and late finish time must be the same

3. The difference between EST and LFT must be equal to
the duration of the activity
Types of Project Network
There are two types of Project Network:
1. The Activity on Arrow (AOA)
2. The Activity on Node (AON)

The major symbols used CPM are:

EST or ES =
Early Start Time or Early Start
EFT or EF

B,3

Early Finish Time or Early Finish

C,7

LST or LS = Late Start Time or Late Start

LFT or LF
=
Late Finish Time or Late Finish
ST
= Start Time
FT
= Finish Time
EET = Early Event Time
LET = Late Event Time
i
= Starting or preceding event
J
= Finishing or succeeding event
FF or FS
=
Free Float or Free Slack
TF or TS =
Total Float or Total Slack
T/t =
Duration/ Time
#
Float is a time available for delaying any
activity not
changing the total project
duration.
#
Free Float (FF) is the time of flexibility
available
which if used will not delay the
early start of the
succeeding activity.
#
Total Float (TF) is the total flexibility available
in
scheduling.
Conditions of Criticality:
1. The early start time and late start time must be same.

Start

D,10

A,8

Project Scheduling with Limited Resources:

*
*
*
*

Until now we have assumed that the constraint is

scheduling an activity, i.e., start and finish date.
In this case the assumption is that the resources are
available in unlimited supply.
But in practice, the availability of the resources is limited,
like limited manpower or budget or equipments.
Jobs that occur in parallel paths in a network may demand
the same limited resources. This situation force
to
reschedule.
Consider a project below plotted as a schedule graph
with a horizontal time scale:

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6
4

3
2

are a very large number of combinations of activity start

time.
Only a computer program will help the Project
Manager in scheduling the project activities.

Chapter- 4
0

6 (Time, Days)

Suppose there are only 10 men available in one day.

6
4

1
8

2 3

5 6 7 (Time, Days)

Complexity of Project Scheduling with Limited Resources

*
We see in the example that there is only one resource
limitation. But in practice, there may be
more
resource limitation.
*
In such situation, it will be very difficult task for Project
manager to schedule the project activities, as
there

Monitoring and evaluation:

Definition:
Monitoring and Evaluation are essential tools, which helps to
improve the efficiency of on going projects and the selection
and design of future projects. It also helps the project team to
make a rational and improve decision about the project
performance. It is must for achieving the objective of the project.
Monitoring is an initial project activity designed to provide
constant feedback on the progress of the project, the problem it is
facing, and the efficiency with which it is being implemented. In
other words it is the gathering of information to review and
analysis project implementation. So the monitoring is an ongoing
and continuous activity throughout the entire life of the project.
The project, which does not have effective monitoring system,
the cost of the project will not be sufficient, targeted time of the
project completion will be increased and the quality of the output
will not as per the target.
David I. Cleland defines Monitoring means to keep track of
and to check systematically all project activities.

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According to Meredith and Mantel, Monitoring is collecting,

recording and reporting information concerning any and all
aspects of project performance that the project manager or other
or others in the organization wish to know.
Evaluation , on the other hand, is mainly used to help in the
selection and design of future projects. Evaluation study helps to
know whether the project could produce or not the intended
impacts and the project was cost-effective or not. Evaluation,
therefore is assessment of whether or not the planned project
strategy actually works in the field. Evaluation should not be
done to prove that the project is successful or to prove that it is a
failure. It should be conducted to improve the strategies and
techniques for the future projects.
Evaluation is an objective and systematic judgment process for
determining relevance, efficiency, effectiveness and impact of
project performance. It is an external activity in the project.
Project evaluation is done during different phases of the project.
David I. Cleland divides project evaluation on the following four
major types:1) Per Project Evaluation:
It is done to select project to determine if it fits the objectives
and overall strategy of the organization.
2) Ongoing project Evaluation:
It is conducted to measure to the status of a project during its
operation.
3) Project complementation Evaluation:
It is carried out for an immediate assessment of the success
upon project completion
4) Post project Evaluation:

It is undertaken to find out the impact of project in society in

long term basis.
Method and technique of M&E:
There are several methods and technique of Monitoring and
Evaluation. Previously, conventional method of M&E was used,
where external experts, based on predetermined indicators to
measure input and output, carried out M&E . The major purpose
of this methods is to ensure accountability of the project staff.
Participatory method and M&E is widely used now a day. In
this method all the project stakeholders collaboratively involve
in the M&E process. This method is action-oriented and cyclic in
nature.
Different donor agencies of the world are providing funds to the
developing and under developed cou8ntries for different projects.
They have developed their own system of M&E. The following
given are the example of the M&E technique adopted by some
donor agencies of the world.
i)

The World Bank:

The world Bank was established to grand long-term loan
to the member countries for the development activities.
The function of the world Bank include Development and
Reconstruction of the member countries, promotion of the
private foreign investment, raise productivity and standard
of living. The performance standards of the WB funded
project are included in the project appraisal report and loan
document. It includes the indicators like development

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objectives, inputs and components of the project, outputs

to be achieved, project impact, assumption and risks etc.
They are stated in the form of policy action matrix or
logical frame work.

The ADB was established in 1996 with an aim to foster

economic development of Asian countries and Far East. It
has also the aim to promote investment of both public and
private capital for the development purpose, to provide
technical and credit assistance to member countries.

Formal monitoring of the project is done on the basis of

trimester progress report and financial statement provided
by the project management information system. The local
office of the WB also monitors the project as and when
needed basis. Information Monitoring is also regularly
carried out through telephone, e-mail and fax.

The formal monitoring system is based on Project

Management Information System(PMIS). The PMIS
generates periodic reports, accounting statement and
statistical analysis on regularly interval. The appraisal
report and loan agreement serves as a base for monitoring.
An informal monitoring is also carried out through
telephone and e-mail.

Project Evaluation is done through external consultants

supported by the WB staff. This evaluation team,
commonly known as, WB mission evaluates the project in
every six months or annually, develops Aide Memoir and
provides to the project management. All the corrective
actions to be taken by the project team as well as the
future activities to be implemented by the project are
included in Aide Memoir.
The World Bank has introduced Loan Administrative
Change Initiative (LACI) in July 1998. The major
objective of this LACI is to ensure sound financial
management in project. This system is being implemented
in new projects. This system was established to monitor
the effectively manage loan.
ii)

The Asian Development Bank:

For the evaluation of the project, the appraisal report and

loan agreement report serves as the base. The ADB uses
various types of evaluation of the project in different time.
They are:
Appraisal
On-going Evaluation.
Project Completion Evaluation.
Benefit Monitoring Evaluation.
iii)

INGOS:
INGOS are the non-governmental organizations. They are
established to support the developing countries. Their
basic focus is on:
Community Development Activities.
Income Generating Activities.
Advocacy Activities.

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Formal Monitoring is done through periodic process

reports and accounting statement. They compare the actual
findings with previously set performance standards in
terms of time, cost and quality and corrective action taken
accordingly. Informal Monitoring is done through
telephone or e-mail.
Evaluation is done on continuous basis. INGO staff
makes a regular visit to the project site and evaluate the
project progress. Based on the policy of the organization,
the visit could be in weekly or monthly basis. Impact
Evaluation is also done for the country program.
Project Control
*
The control is an essential function of management
*
The control is a process of monitoring,
evaluation
and comparing planned results with
actual results to determine
the status of the project cost,
schedule and performance
standard.
As per David I Cleland Control is a fact finding and remedial
action process to facilitate meeting the project objectives and
goals, its primary purpose is not to determine what has
happened, but rather to predict what may happen in the future if
present conditions continue and if there are no change in the
management of the project.
According to Koontz and Weihrich, The controlling is the
measurement and correction of performance in order to make
sure that enterprise objectives and the plans devised to attain
them are accomplished.

As per Ivancevich, Donnelly, Wilson, Controlling consists of

actions and decisions managers undertake to ensure that actual
results are consistent with desire results. Hence the control is a
managerial function and continuous process. Control measures
actual performance and compare it with standards to identify
deviations. Planning provides standard for control. Deviations
are identified in order to take corrective actions.
Types of Control:
1. Concurrent Control:
It is also known as Yes/no control. It is process based. It
occurs while an activity is still talking place.
2. Pre-control:
It is also known as predictive or preventive control. It is
input based control. It attempts to anticipate deviation in
advance and allows corrective action to be in advance of
the problem.
3. Feedback Control:
It is called historical or post control. It is output based
control. Results are measured after the completion of the
project.

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i)
ii)

Project Control System

Establishing Standard

Take Corrective Action

How the project is doing?

What is the cause od deviation if it exists?

Corrective Action:
It could be in the form of re-planning, re-programming, reallocating resources or changing the organization and
management.
It usually focused on cost, schedule and quality performance of
different parameters of the project.

Observing

Performance

Comparing Actual Performance

Establishing Performance Standard

Key standards in project control include:
1. Scope of Work.
2. Specification
3. WBS
4. Work Package
5.
Cost Estimate & Budget
6.
Master and supporting Schedule
7.
Financial Forecast and funding plans
8.
Quality 9. Reliability 10. Productivity
11. Physical Quantity of work
Performance Observation:
It is receiving sufficient information about the project to make
comparison of planned and actual performance. It can be
obtained through formal and informal sources.

Control Cycle
Establishing Standard
Project Operation
Observing Performance
Feedback
Comparing actual with targeted
Deviation Analysis
Corrective Action

Comparing Actual and Planned Performance:

It answers two key questions
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FEED BACK CONTROL SYSTEM:

Elements of Cost control:
Feed back control system mainly focuses on the data obtained
from project implementation and does not use available
historical data. This system is used to show difference between
actual progress & planned targets & resources used against
estimated quantities or budgets.
In Feed back control system data from implementation field is
obtained to compare;
# Schedule start VS Actual Start
# budgeted cost Vs Actual cost
# Estimated Quantity Vs Actual Quantity
# Scheduled Time Vs Actual Time
# budgeted manpower Vs Actual manpower
# budgeted unit cost Vs Actual unit cost
This system always gives information after something already
happen. This is why this system may not be suitable for
controlling for controlling the activities of on going projects but
Feed back from a project may be used as historical data for
planning & controlling other projects.

The following are the various elements which play vital role for
overall cost control of a project.
1) Observation: Regular observation should be made on
- material consumed
- manpower consumed
- equipment employed
- other direct cost
2) Comparison: Comparison shows deviation between
observed data & design standard.
3) Identification for reasons for deviation: For identifying
reasons for deviations, it is essential to check
- the purchase price of material
- quality of material
- quantity of wastage
- efficiency of equipments
4) Take Corrective action: If the deviation is beyond the
tolerable limit then it will be essential to take corrective
action.
WORK BREAKDOWN STRUCTURE:(WBS)

COST CONTROL:
Cost control is basically achieved by decision making process.
Any delay in decision making incurs more cost and hence project
becomes more expensive. Therefore prompt decision making is
one of the best criteria for cost control.

WBS groups project activities in hierarchical order for each

stage of project. The project work is broken down into
smaller elements which will be manageable & measurable.
According to Goodman & Love,

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WBS is a systematic & disciplined approach for breaking

down a project into its many components
- WBS lists all the activities needed to complete the project
in a hierarchical order.
- WBS breaks down project activities in small elements.
- WBS presents inter-relationship of activities.
- WBS establishes cost & budgets.

PROJECT MANAGEMENT INFORMATION SYSTEM: (PMIS)

A Project operates in a dynamic environment. The project

manager needs timely and accurate information to respond to
environmental change. Information is life of a project. It is prerequisite of project control.
PMIS is anyway of collection of data that will help the manager
to perform his job efficiently & effectively. PMIS is formalized
& structured activity of individuals, machines and methods for
providing information to managers on a regular basis to assist in
planning, allocating resources, controlling activities and making
decisions. The essence of PMIS is the collection of actual data,
grouping the data for specific purpose, analyze the grouped data
and use the data to prepare report to indicate organizational
performance.
Elements of PMIS:

# Input: It consists of data generated by various projects.

# Transformation: It is the process of storage & retrieval of
information.
# Output: It is the performance of project.
# Feed back: It provides information to redesign input activities.

Chapter- 5
Capital Planning and Budgeting
1.

Nature of Investment Decision:

The Investment Decision of an organization is generally
known as the Capital Budgeting or Capital Expenditure
decisions. A capital budgeting decision may be defined as the
organization ' decision to invest its current fund( budget) in long
term assets in anticipation of an expected flow of benefits over a
series of years.

The firm's investment decision would generally include

establishment expansion, acquisition, modernization, and
replacement of long- term assets. Advertisement campaign, and
Research & Development activities have also long- term
implication for the form's benefits and so, they are also be taken

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as investment decision. Thus the following are the feature of

Investment decision or Capital Budgeting:
a)
The exchange of current fund for future benefits
b)
The funds are invested in long term assets
c)
The future benefit will occur to the firm over the
series of years
The expenditure and benefits should be measured in cash. In the
investment analysis it is cash flow rather than accounting profit.
2.

Importance of Investment Decision:

Due to the following reasons, Investment decision requires
special attention:

They influence the firm's growth in the long run

They affect the risk of the firm

They involve commitement of large amount of fund

They are irreversible or reversible at substantial loss

They are among the most difficult decision to make

3.
Type of Capital Investment:
The Capital
Budgeting can be classified in different
ways: The simple way of classification is:
a)
Physical assets
b)
Monetary
c)
intangible
a)
Physical assets are tangible such as : Land, building,
vehicle, lab equipments, furniture, office equipment
b)
Monetary assets are financial claims against some
parties, Like Deposits (TU & CTEVT). Equity
shares are the examples of monetary assets.
c)
Intangible assets are investment in R&D activities,
training, advertisement etc, which in long run
generate benifit to the organization.

Similarly it can be classified as below:

a) Mandatory Investment: Basic statutory equipments
required to run the firm or organization,
b) Replacement Investment : Replacement of old
equipment by new with an aim to reduce operating cos
c) Expansion Investment : It is to increase the capacity
to cater to a growing demand.
d) R&D Investment : It is to develop new products and
process as well as market demand.
e) Miscellaneous : Interior decoration, landscaped ,
gardens etc.
4.

Phases of Capital Budgeting

a)

Planning : broad investment strategy and preliminary

screening of project proposals

b)

Analysis : If project seems to be preliminary feasible than

marketing, technical, economic and ecological analysis is
carried out.

5.

Selection ( Investment Evaluation Criteria) :

Selection follows and often overlaps analysis. A wide
round Appraisal Criteria have been suggested to judge the
worthfullness of a project. They are divided into two board
areas:
i)
Non-discounting Criteria:
* Pay-Back Period (PBP): Which should be less than
target period.

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* Accounting rate of return (ARR): Which should be

greater than target rate.
ii)
Discounting Criteria:
* Net Present Value (NPV): Which should be greater
than zero(o).
* Internal Rate of Return (IRR): Which should be
greater than the cost of capital.
* Benifit Cost Ratio (BCR)
6. Financing : Once the project is selected, financing
arrangement has to be done. Two major source of financing
are equity and dept.
i)
Equity: Shareholders fund, or retained
earnings.
ii)
Debt: Loan funds
7.
Implementation
8.
Review

- Benifit cost ratio (BCR)

- Internal Rate of Return
(IRR) II. Non-discounting Criteria
1.

Payback Period (PP)

Accounting Rate of Return (RR)

t =1

The main aim of Investment Criteria is to facilitate an easier

understanding of costs & benefits, risk analysis and cost of
capital. More than 30 criteria have been proposed, but the most
popular and important Investment Criteria are classified into two
major categories they are:
I.

Discounting Criteria
- Net Present Value (NPV)

Ct

- Initial Investment

(1 + r)t

Where:

Ct - Cash flow at the end of t year

n - Life of Project
r - discount rate/ the cost of capital
or
rate of
return,
which is
assumed in
the beginning of the project based on the risk of Project
Example : The initial Investment of the Project is
1,800,000/-. Cash flow for 5 yrs period are 400,000/-;
450,000/-; 500,000/-; 550,000/-; 600,000/- and cost of
capital is 10% ; Calculate NPV;
NPV= 400000 + 450000 + 500000 + 55000000 + 600000 -1,800,000/1

Investment Criteria Technique of CB (Capital Budgeting)

NPV of a Project =

(1 + 0.1)

(1.1)

(1.1)

(1.1)

(1.1)

= 363636.36+371900.02+375657.4+372555.1
= 21859407/- -1800000/- =59407 > 0. So accepted.
The NPV represents the net benefit over and above
compensation for time & risk.
2. Benifit Cost Ratio (BCR)
BCR =

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PVB
____________ (1)
I

PVB I

Net Benifit Cost Ratio (NBCR) =

= BCR-1 ______(2)

As me know; NPV =

Where,

PVB - Present value of benefit

I - Initial Investment
n

Present Value (PVB) =

t =1

BCR = (1.1)

20000
2

(1.1)

20000
3

(1.1)

25000
4

(1.1)

BCR > 1 - accept

BCR = 1 - indifferent
BCR < 1 - Reject

Given: Investment = Rs. 100,000: cash flows for four years are
30,000/ -; 30,000/- ; 40,000/-; 45,000 and discount rate is 15%.
Calculate IRR.
IRR is calculated by the process of trial & error by assuming yhe
value of r

Then :

500000 = 0.124
g

62266.92

Ct
(1 + r)t
t =1
n

i) say r = 15 %

5,00000/=

- Investment

As per definition ; OCO Investment =

Ct
(1 +
r)t

If Initial Investment = 5,00000/and rate of return (Cost of Capital)= 10%

and cash flow by year for 4 yrs are 15,000; 20,000; 20,000;
25,000 then
15,000

Ct
(1 + r)t
t =1
n

1 reject

30000

1.15 + (1.15)

30000
2

+ (1.15)

40000
3

45000

+ (1.15)

=100802 Which is > 100000/- ; so r> 15%

ii) say r = 16%

NBCR > 0
NBCR = 0
NBCR < 0

Then:

30000
30000
40000
45000
2 + (1.16)
3 + (1.16)
4 = 98641;
1.16 + (1.16)

By interpolating these two numbers actual value of r can be identified.

1RR : Very simple to understand in the case of one- period

project
Example :If you deposit 10,000 and get 10800 after one year
then the Rate of Return would be :
10800 10000
RR =
= 0.08 or
8% 10000
3.

Internal Rate of Return

The 1RR is the discount Rate which makes its NPV = 0;

If IRR > cost of capital (discount rate )

If IRR <
,,

accept
reject

Non discounting criteria:

4.

Pay Back Period

PBP is the length of time required to recover the initial
cash outlay on the project. Say the initial Cash out lay of

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the project is 1,000,000/-; The cash in flows are 200,000;

300,000;300,000 & 400,000 by the end of each four years
then PBP is 4 yrs.
If PBP > Target period of project - reject
If PBP < ,,
,,
,, - accept

5.

Accounting Rate of Return (ARR)

ARR is also known as Return On Investment (ROI) uses
to measure the profitability of an Investment. This is
average income after tax, profit by average Investment.

period
1.Earning before depreciation
interest & taxes (EBDIT)
2. Depreciation
3.
Earning before interest
(EBIT)
4. Taxes 50%
5.
Earning before interest &
after Tax [EBIT (1-T)]
6.Book Value Investment
Beginning
Ending
Average

ARR =

AverageIncome
ARR = AverageInvestment

ARR =

Average

15000 20000 25000 30000 22500

10000 10000 10000 10000 10000
5000 10000 15000 20000 12500
2500
2500

5000
5000

7500
7500

10000
10000 6250

40000 30000 20000 10000

30000 20000 10000
35000 25000 15000
18750

AverageIncome
= 6250 x 100 = 33.33%
AverageInvestment 18750

ARR > target rate - accept

< ,,
- reject

t =1

EBIT t(1 T ) / n

Operational & Capital Budget

(Io + In / 2

A Project will cost Rs.40,000/- ; Its stream of equations

before depreciation, interest and tases EBDIT during 1st yr.
through 4 years is expected to be 15,000 ; 20,000 ; 25,000 ;
30,000. Assume 50% tax rate and 10,000 depreciation in straight
line.

1.

Budgeting or profit planning is a detailed action plan

during a period of one year or less.
Firm or organization should achieve its objectives by
minimizing the use of resources.
Financial planning indicates a firm 's growth,
Performance, investment and requirement of funds during
a given period of time usually 3 or 5 years.
Financial Planning
Growth in sales is an important objective of any firm

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4.

3.
Operating Characteristics : Analysis of firm' s
operating characteristics like product, market,
competition, production & marketing policies,
control system, operating risk.

3.

Corporate Strategy and Investment Needs:

Determining the firm's investment needs and overall
strategy.

Consistency : Evaluating the consistency of

financial policies with each other and with the
corporate strategy.

Financial planning is long -term plan of the firm which

includes long -term growth and profitability, investment
and financing decision.

Steps of Financial Planning

1.
Past Performance : Analysis of past performance
of the firms financial strength weakness
2.

Consequences of financial plans : Analysis the

consequences of its financial plans for the long term
health and survival to firm.

7.

Financial forcasting is the basis of financial planning and

financial forcasting is the estimate of future fund based on
past data.
2.

Financing Alternatives : Analysis of financial

alternatives and dividing appropriate means of
raising fund.

6.

The process of estimating the funds requirement of a firm

and determining the sources of the fund is known as
financial planning.

Cash flow from operation : For casting firm's

revenue and expenses based on its investment and
dividend policies.

5.

Increase in firm's market share lead to higher growth.

Firm needs assets for higher growth.
It requires to increase production capacity for which
additional plant and machinery has to be added.
When internally generated fund of the firm will not be
sufficient to meet above mentioned needs, then firm needs
to manage external fund i.e. by in using equity or debt or
both

Profit Planning (Budget)

Profit planning or Budget is short-term financial plan. It is
an action-plan to guide managers in achieving the firm's
objectives. A budget is a comprehensive and coordinate
plan, expressed in financial term.
The basic elements of budget are:
It is comprehensive & coordinated plan

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It is expressed in financial term

It is a plan for the firm's operation and resources
It is a future plan for specified periods.

A Budget is :

Integrated plan

Financial Qualification

Operations & Resources

Time Element

Preparation of profit plan (Budget)

A comprehensive planning and budgeting system generally
includes.
a)
A sales budget
b)
A production budget
c)
A purchasing budget
d)
A cash budget
e)
Performa financial statement
f)
Capital expenditure budget

The major objectives of Budget are:

the firm's expectations (goals) in clear and formal

terms to avoid confusion and to facilitate their
attaintability.( Statement of expectation)
to communicate expectations of the firm to all
concerned staff of the firm, so that they can
understand,
support
&
implement
(communications).
to provide detail action plan (planning).
to coordinate the activities and efforts in such a way
that the use of resources is maximized.
(Coordination)
to provide a means of measuring, controlling the
performance of individuals and units and to supply
information on the basis of which the necessary
corrective action can be taken (Control).

a)
i)

Sales Budget
The area wise sales of products A & B are as follow:
Sales Area

product %
A
10
20
70

X
Y
Z
ii)
iii)

50
30
20

The selling price of product A is Rs.10, & B is Rs. 20.

Sales forcast in monthly basis are as follow:

Product
A
B

Jan
(No)
500
1000

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Feb
(No)
1000
2000

March
(No)
1500
3000

Total
(No)
3000
6000

1.
Sales Budget
Month
Area of Product Jan
Feb
Sales Area X
Product A 500
1000
Product B 10000 20000
Total of Area :
10500 30000

I.
March
1500
30000
31500

Total: 700
(-)Opening stock: 400
Unit A to be produced : 300

3000
600000
63000

II.
1000
6000
7000

2000
12000
14000

3000
18000
21000

6000
36000
42000

Sales Area Y
Product A
Product B
Total of Area :

3500
4000
7500

7000
8000
15000

10500
12000
22500

21000
24000
45000

2.

59000

Feb
1000
500

March
15000
700

1500
500
1000

2200
800
1400

Total(Rs)

Sales Area Y
Product A
Product B
Total of Area :

Total for all areas 25000

Estimate sales of A:
Desired closing stock

Jan
500 units
200

75000

159000

Production Budget

Budgeted Production (units) = (Sales estimate + Desired /

Expected closing stock) - opening stock

Estimate sales of B:
Desired closing stock

1000
500

Total: 1500
(-)Opening stock: 500
Unit B to be produced : 1000
3.

2000
1000

3000
1500

3000
1000
2000

4500
1500
3000

Purchasing Budget
In the production of each product A and B needs one
common material. Say to produce A need 2 units of
materials and to produce B 4 units of materials. The cost
of one unit of materials is Rs 2/- Labour cost is Rs5/- per
hour in which one can produce 1 unit of materials.

Then Purchasing Budget is as follow:

Jan

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Feb

March

a)

Material needed to Produce A

(1 unit x 2 unit of materials) 600
Materials needed to produce B
(1 unit x 4 unit of materials) 4000

2800

Purchase (units)

4600
2000
6600
3000
3600

8000
10000
5000
15000
8000
7000

12000
14800
8000
22800
10000
12800

Cost of purchase @
Rs.2/- per unit

b)

2000

7200

14000

25600

Total production needed

(+) Desired closing balance
(-) Opening balance

4.

f)
g)
h)
i)
5.

Feb
1000
2000
3000
3000
15000

Sales Revenue
Cost of goods sold
Product A
Product B
Gross Profit
Operating expenses
Salaries
Rent
Sales Commission
Interest
Depreciation
Net Profit

March
1400
3000
4400
4400
22000

Rs
*

*
*
**
(*-**)
X

5.

4.

Performa Income Statement

Rs

Labour Budget

Jan
Units of A to be produced
3000
,,
,, B ,, ,, ,,
1000
Total Units 4000
Total hours at 1 hr per unit
4000
Total labour cost @ Rs.5/- per hr (Rs)20000

Min-cash balance (ending)

Borrowing (repayment)
Interest
Cash balance ending

(*-**)-X

Performa balance Sheet

Cash Budget
Jan
a)
b)
c)
d)
e)

Feb

March

Description
Opening cash balance
Add cash collection
From sales + debtor collection
Less cash disburshment, Raw materials purchase
Total cash disburshment
Cash surplus or deficit

Capital & Liabilities:

Creditors
Loan
Interest payable
Share Capital
Profit

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- Large and medium firms have comprehensive system of

budgeting Prepares budgets for all their important
operations.
- A master budget with a complete package of the
components budget is prepared in comprehensive
budgeting.
- Three important components of master budget are:
1) Operating budgets.
2) Financial budget
3) Capital budget.

Assets:
Cash
Debtors
Stock
Raw Materials
- Product A
- Product B
Plant & machinery
Less depreciation

_________

1)

Advantage of Budgeting

Forced planning The budgeting process forces

mgmt to plan

Coordinated operations

Performance evaluation and control

Effective communication

Optimum utilization

Productivity improvement

Types of Budgets:
- All enterprises make plans.
- Some in systematic and formal way, while some in an
informal manner.

Operating Budgets
Planning of the activities or operations such as production,
sales and purchase is operating budget. Operating budget
is composed of two parts: a program/Activity Budget and
Responsibility budget. These are the two different ways of
working at the operations of the enterprises but arriving at
the same result.
1.a) Program or Activity budget:
This specifies the operations or function to be preformed
during the year, in which budget is prepared and past
financial statements indicates the direction of change in
the financial position and performance of the enterprises.
Manager takes it as a guideline for future budgeting.
1.b) Responsibility budget:

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Responsibility budget specifies plans in terms of

individual responsibilities. The focus is on individuals.
The basic purpose of this budget is to control by
comparing the actual performance of a responsible
individual with the expected performance. Program budget
is planning process while responsibility budget is control
devices. Program budget need not to tailored to the
organizational structure, of the enterprises, but
responsibility budget must be. Therefore, the plan
(program budget) must be converted into the control
(Responsibility budge).

2.1.

This is the most important component of financial

budget. A good management always keeps its cash
balance at optimum level: too little cash endangers
the liquidity of the company, and much cash tends
to impair profitability. The major objectives of cash
budget is to plan cash balance in such a way that the
company always maintains sufficient cash balance
to meet its needs and uses the idle cash in the most
profitable manner.

There are two ways in which the operating budget may be

prepared. i) Periodic budgeting.
ii) Continuous budgeting .

2.2

Financial Budget:
The expected cash inflow and cash outflow, financial
position and operating results are the basic concern of
financial budget. The important component of the
financial budget is cash budget and Performa Financial
Statements.

Performa Financial Statements:

Performa Financial Statements in the form of
Balance sheet and income statements show the end
result of the budgeted operations. Performa
Financial Statement provides information about
future assets, liabilities and revenue and expenses
items. The analysis of the present and past financial
statements indicate the direction of change in the
financial position and performance of the
enterprises. Manager takes as guide line for future
budgeting

In periodic budgeting comprehensive revision is not

provided while in continuous budgeting revision of budget
for changing condition is provided.
In case of the stable firms, which can forecast with
reasonable precision, periodic budget can be used whereas
in case of those firms, which operate in the condition of
uncertainties, Continuous Budgeting is used.
2.

Cash Budget

3.

Capital Budgets.
Capital budgets involve the planning to acquire
worthwhile projects, together with the timing of the

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estimated cost and cost flows of each project. Such project

requires large amount of fund and have longterm
implication. It is very difficult to prepare capital Budget. ]
The capital budget is generally prepared separately from
operating budget. Separate committee within enterprises is
formed to prepare capital budgets.
Fixed and Flexible Budget
1)
2)

Fixed Budget is also known as static budget or master

budget.
Flexible Budget, which is also known as variable budget is
a budget that adjusts for changes in sales volume and other
cost- driver activities.

Budget formula per unit

Units
Sales
Variable cost expenses
- Variable manufactur cost
- Shipping expenses
- Administrative
Contribution margin
Budget formula per month
Fixed Cost
Fixed manufacturing costs
Fixed selling & administrative
cost
Operating Income

Flexible Budget
formula
Rs.30

Flexible budget for various level

of sales / product
7000
8000
9000
210000
240000
270000

Rs. 20
Rs.0.8
Rs. 0.2
21 .0
9.0

140000
5600
1400
147000
63000

160000
6400
1600
168000
72000

36000

36000

36000

34000
70000

34000
70000
(9000)

180000
7200
1800
189000
81000

34000
70000
2000

Flexible Budgets
Say the unit cost in sales is fixed and varry the quantity of
product

36000
34000
70000
11000

Audit
Accounting is more an art than a science. It is based on a
set of principles on which there is general agreement, not on
rules that can be proved. An accounting system is a formal
mechanism for gathering, organizing and communicating
information about an organizations activities. Each and every
organization adopts generally accepted accounting principles
(GAAP). GAAP includes broad concepts or guidelines and
detailed practices, including all conventions, rules, and
procedures that together make up accepted accounting practice at
a given time. However internal accounting reports need not be
restricted by GAAP. But in each country, the government has
made its own system of accounting. And based on the nature of
the organization, they are made responsible to adopt the
particular accounting principles.
Audit is a controlling mechanism used in accounting
system. In each country, the government has its own independent
body, which is responsible to control the account of all
organizations inside the country. The office of Auditors is the
central independent body in our country for this purpose.
Audit is an examination or in depth inspection of financial
statements and companies records that is made in accordance
with generally accepted auditing standards. It culminates with
the accountants testimony that managements financial
statements are in conformity with general accepted accounting
principles. Mostly two different types of audit are in practice.
They are:

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o Examine the significance of environmental

implications;
o Recommend preventive and corrective mitigating
measures;
o Inform decision makers and concerned parties of
environmental implications and
o Advise whether development should go ahead.

4. Internal Audit
5. External Audit

Purpose of EIA

EIA provides a systematic examination on

environmental implications of proposed actions and
alternatives to assist decision making.

The cost benefit and trade off analysis between the

project implementation and associated environmental cost
facilitate the decision makers in making decisions which are
more likely to result in sustainable projects.

Chapter-6
IMPACT ANALYSIS

Environmental impact Analysis (EIA)

DEFINITION
EIA ha been defined in slightly different ways by many
authors and institutions both nationally and internally.
One of the most complete and clear definitions, given by
Munn (1979), refers to the need " to identify and predict
the impact on the environment and in man's health.
Usefullness of EIA
EIA is considered as a project management tool for
collecting and analyzing information on environmental
effects of projects to aid planning and implementation
of decisions. It is used to;
o Identify potential environmental impacts:

Project Types

EIA generally applies to projects, which require

construction (e.g. infrastructures or manufacturing projects)

There are two types of

projects: o Point and
o Band
Points refer to power station, bridges
Band refer to roads, transmission lines
Impacts and Effects
In many cases, the terms Impact and effect are used
synonymously.

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However, the term Impact is an outcome of two
preceding events.

Take an example:
o An example of air pollution deposited on the
leaves of crops which shows down the
photosynthetic process (change) and reduces
crop yield (effect), affecting the farmer
economically (adverse impact)
o If the deposition of air pollution in marsh land
reduces the oxygen content in the water
(change), which prevents respiratory actively
mosquito larvae (effect), it eventually kills them
(beneficial impact).
The EIA Process

In all national EIA systems, there is a basic sequence of

activities, which is followed once a project has been
identified.

The main activities of EIA process with their brief

comments are explained below in their logical sequences :
1.
Project Screening: Determines whether the project
in question, needs an EIA.
2.
Scooping: This process identifies all significant
Impacts. It form the basis for the terms of reference.
3.
Project description and consideration of
alternatives: It seeks to describe all reasonable
alternatives, including the preferred and "no action"
options (project location, scale, process layout and
operating conditions.

4.

5.

6.
7.

8.

9.

10.

11.

12.

Description of environmental baseline: It

establishes the current state of environment and any
trends.
Prediction of impacts: The impacts are predicted
as far as possible, quantitatively in terms of
characteristics such as magnitude, extent and
duration.
Evaluation of impacts: The significance or
importance of the predicted impacts is determined.
Mitigation measures: It measures to avoid, reduce
and minimize adverse impacts and to enhance
beneficial impacts are designed.
Stakeholder involvement: It occurs at various
stages in the EIA process to ensure quality,
comprehensiveness and effectiveness of EIA and to
ensure that stakeholder views are adequately
addressed in the decision-making process.
Monitoring and auditing measures: Impacts
which should be monitored are identified and any
auditing requirements are specified.
EIA Report: It contains the information obtained,
analyzed, interpreted and compiled in a report form.
The report should contain a non-technical summary,
methods used, results interpretation and conclusion.
Review: EIA report submitted for review in order to
access whether or not all the possible issues have
been adequately addressed and to facilitate the
decision making process.
Decision-making: With the help of information and
conclusions give in EIA reports and the outcome of

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reviews, the decision makers determine whether or

not the project should go ahead.
Screening the project

Many projects are considered by the government for

implementation every year.

EIA needs only be applied for those actions which may

significantly affect the environment.

It is therefore important to establish mechanisms for

identifying projects requiring EIA; this process of
selection i called a "screening the project".
Objectives of screening the project

Screening of development proposal during the early stages

of project planning accomplishes the following :
o Saves money
o Saves time (i.e. avoids unnecessary delays)
o Immediately identifies the major environmental
impacts that are likely and
o Establishes a conception that an EIA study needs
to be conducted.
o
Screening Procedure in the Nepal National EIA Guidelines

The National EIA Guidelines 1993 lists of project,

thresholds and sensitive area as criteria to assist screening.

All projects are divided, generally into three categories:

o Projects requiring Initial Environmental
Examination (IEE)
o Projects requiring EIA and

o Projects for which it is not clear whether an EIA

or IEE is needed.
1. Projects requiring IEE

The guidelines contain three schedules which contain

separate list of different project types.

When a project is propose, it is necessary to check whether

the project is listed or not.

if it is list in schedule 1, it requires an Initial

Environmental Evaluation (IEE)

Schedule 1

The projects listed in schedule 1 are those which are likely

to have limited number of significant impacts, which can
be easily predicted and evaluated and for which,
mitigation measures may be prescribed easily.

The IEE is used to confirm whether this is, indeed,

requires the consideration of EIA.
Schedule 2

The projects listed in schedule 2 are those projects, for

which, EIA is required.
Schedule 3

Schedule 3 contains a list of environmentally sensitively

areas and any project, which is likely to impact such an
area, must be subject to an EIA.

All other projects must be examined on a case by case,

basis to decide whether or not IEE or EIA required.

If there is an uncertainty, then an IEE should be

conducted.

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 The results of the IEE will determine whether or not an EIA

is required.
Initial Environmental Examination (IEE)

Projects for which requirement of an EIA could not be

easily ascertained, is subject to and IEE
An IEE is carried out to determine if significant adverse

environmental effects are likely to occur which requires

detailed study before mitigation measures ban be
determined.

Therefore, an IEE requires :

o Adequate in - depth analysis than screening.
o Adequate technical input and advice from
environmental specialists and experts and
o Adequate amount of more resources and time
If IEE provides solutions for potential environmental
problems and the application for screening was not able to
identify problems properly, then there is no need for
conducting a full scale EIA.

How IEE should be conducted?

In order to carry out an IEE, it is necessary to understand

the following components of the project activities and the
surrounding environment :
o Project activities to be implemented.
o Setting of project, resources, de4mands and the
waste produced.
o Policies, regulation and guidelines to be known
of IEE and

o Resources and environment are likely to

impacted.

This information can easily be made available in the

project proposal and some experts may visit the project
area as an inventory survey which may be called a
preliminary analysis.

Social Impact Analysis

DEFINITION
The development activities of the development projects
usually change the social culture and social way of life of
the indigenous ethnic group anywhere in the project areas.
These changes effect the quality of life, social organization
and structures, including language, ritual and other general
life, relationship between generation and value system.
The effects of these factors impact the large social
systems.
In basic terms, there may be seen alterations in the ways,
people live, work, play and their needs, values, beliefs and
norms.
The study of this impact of the social systems is called
Social Impact Analysis.
Generally social impact analysis covers the following
areas:

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o Demographic impacts: Such as displacement and

relocation effects and changes in population make
up.
o Socio- economic impact - including income and
income multiplier effects, employment rate and
patterns, prices of local goods and services and
taxation effects.
o Cultural impacts - traditional patterns of life and
work, family structures and authority, religious and
tribal factors, archaeological features, social
networks and community cohesion.
o Institutional impacts - including demands on the
government and social eservice, NGOs in areas such
as housing, schools, criminal justice, health, welfare
and recreation.
o Gender impacts - the implications of development
projects on the roles of women in society income
generating, opportunities, access to resources,
employment opportunities and equity.
Relationship between social impact and EIA
The close relationship between social and environmental
systems makes it imperative that social impacts are
identified, predicted and evaluate in conjunction with
biophysical impacts.
For example :
o Eradication of malaria from Nepal's Terai region by
the appli9cation of DDT in the 1960 eliminated the
anopheline mosquito - a vector species of malaria.

o People from different parts of Nepal moved into the

area and settled in number of new villages.
o These people exploited the newly available natural
resources in an un sustainable way by significantly
reducing forest and wildlife population.
o This illustrates an environmental change giving rise
to social problems.
Different ways/ steps / aspects to be considered while
studying social impact analysis
Social impacts are very difficult to identify and predict and
degree of certainly because of the variety and complexity
of social structures and systems.
However, demographic and cultural resource impacts may
be more objective, so it becomes easier to identify and
predict them.
st
1 step/aspect
The first step in social impact analysis is to identify social
groups which make up local communities.
Relevant characteristics which may be used to identify
such groups include:
o Ethic/tribal
o Occupational
o Socio-economic status and
o Age and gender
nd

step/aspect
Another aspect of social impact analysis is the
consideration EIA for a project which is being planned for
the implementation in an ecologically sensitive area, from
which the local people are deriving their livelihood.

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 People utilizing resources in such an area can be broadly

categorized into three resource and group:
o Those who residents from generation to generation,
stable, low - energy and sustained yield production
systems, opened by local people, based on
knowledge transmitted through generations, well
adapted and compatible with the environment.
o New settlers who have comparatively less
knowledge or the resource base of the area and of
sustainable resource- use practices and usually
devastate the area through excessive use of
biophysical resources.
o Non- residents people, who often visit the area for
exploitation of biophysical resources and are
potentially more dangerous than either of the above
type.
3rd step/aspect
It is always advisable to avoid involuntary resettlement,
mostly in case where vulnerable groups of people are
involved and
In case where projects require land acquisition from
indigenous territories, the people affected should be
compensate adequately so that their standard of living is
improved or at the least, is at similar level.
Economic Impact Analysis

The focus in economic impact analysis is the estimation of

the change in economic variables caused by:
o Project construction and operation
o Work force requirement and the income earned by
workers
o Raw materials and other inputs for the project and
o Capital investment
Project Construction & Operation
It is essential to estimate the size of the labor force, skilled
manpower requirement and their duration of their
involvement. The requirement of manpower varies at
different stages of project implementation.
Work force requirement and the income earned by workers
A thorough analysis of the labor force and the local
economy requires information on:
o The categories of labor available
o The categories of labor that are highly demanded
and employed, not employed and partly employed.
o Estimation of unemployment labor
o Proportion of females looking for employment and
o The number and type of employment likely to be
generated by project implementation.
These data can be manipulated for analyzing and
predicting economic impacts.
The money that comes into the area in the form of wages
is the initial income injection into the local economy.

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 Some part of such extra money will be spent on buying

goods and services helping to improve the economy of
those who sell goods and services.
In this way, a flow of money in the project area is being
maintained with certain changes in the economy at each
stage.
Thus, the value of the economic multiplier will be high. In
some cases, the income earned by labor will remitted
outside the project area to their families; in such cases, the
value of multiplier would be low.
This is the reason why the emphasis on the employment of
local people is desirable rather than employed people from
outside the project area.
Raw materials and other inputs for the project
Social impacts are the outcomes of economic impacts and
this is particularly true for the project in which migration
of workers from outside is dominant.
This does not always happen; however if happens when
the labor market in the local area is insufficient.
In- migrant labor forces can take up nay type of
employment and create social problems.
The impacts create in the operational stage are more far
reaching than in the construction period.
The reason is that most workers during the construction
tend to be unmarried and stay on site for short period of
time.
However, workers in the operational period tend to remain
for longer periods of time and bring their dependents with
them; as a result, the impacts on he local service provision

such as schools, hospitals, sewage treatment will be more

comprehensive and long lasting.
Capital Investment
In developing countries, with development activities going
on, large numbers of people are attracted in search
employment.
Such a massive aggression of people can place significant
additional strains on the local infrastructure environment
and local government resources.

Questions on Project Management

1.

2.
3.
4.
5.
6.
7.

Define Project and its major components. What are

different characteristics of the project? How project
objectives and goals are set?
Discuss different phases of Project Life Cycle.
Define Feasibility study. How Project Proposal is
prepared?
Discuss Project Environment.
What are project - identifying tasks. Explain Project
Appraisal.
What is project planning? Discuss project - planning
function.
What is Bar Chart? Discuss different types of bar chart.
Explain its advantages and discrepancies.

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8.
9.

10.
11.
12.
13.
14.

15.
16.

17.

18.
19.
20.
21.

Define Goal Oriented Project Planning (ZOPP). Discuss

different phases of ZOPP.
Define Network models CPM/PERT. Discuss basic
concept of CPM/PERT. What are different steps involved
in PERT?
Discuss project scheduling with limited resources. Explain
manpower scheduling.
Define plan of operation and its different form.
Discuss Monitoring and Evaluation. What are different
methods and techniques in Monitoring and Evaluation?
What is a system of control? What are the purposes of
quality control system?
Discuss project control cycle and feedback control system.
What are the different techniques involved in Project
control?
Define project management information system (PMIS),
its purpose and advantages.
Define capital planning and budgeting. Why investment
decision required special attention? Discuss different types
and phases of capital budgeting.
Define capital planning procedure and features and
importance of capital budgeting. Discuss investment
evaluation criteria.
Discuss investment criteria. What are the two major
categories of investment criteria? Illustrate with example.
What is profit planning (Budget)? Discuss different types
of budget.
Define three major component of master budget. Illustrate
with example how sales budget is prepared.
Discuss different steps involved in the preparation of the
budget in an enterprise.

22.
23.
24.

Define Environmental Impact Analysis. Discuss social and

economic impact analysis.
Draw network diagram from the following given data and
calculate EST, EFT, LST, LFT, TF, FF.
Write short notes on:
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
xi)

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WBS
Project control cycle
Profit planning
Capital budgeting
Fixed and flexible budget
Discounting criteria
Non-Discounting Criteria
Material Scheduling
Operating Budget
Project Appraisal
Auditing