Project Formulation and Evaluation
Procedures for Formulation and Evaluation
Project Concept
Robbins (1997): A set of activities performed only once, with a defined beginning and end time.
Rodrigo Varela (1977): Any activity aimed at achieving a specific result. Finding a clever solution to a development opportunity or solving a problem. Allocation of resources to an opportunity to achieve certain objectives or goals. Activity to which resources are assigned to achieve a variety of goods (or services).
Nassir Sapag (1991): Explicitly addresses the problem of the optimal allocation of scarce resources by the decision-maker. Recommends different methodologies to determine the relative desirability of an action or project.
Project Cycle
Project Cycle II
Project Formulation Procedures
The preparation stage defines all characteristics influencing the project’s cash flow.
Prior to the project study is idea identification, involving a diagnosis that detects the need for the project and identifies solutions.
The initial study level, the profile, uses existing information, common opinion, and experience. Monetary estimates of investments, costs, and revenues are global, without field research.
The comprehensive study level, the feasibility study, uses primarily primary sources. Financial and economic variable calculations must justify item valuations. It can explore the “best alternative.” This stage concludes the pre-investment study.
Project preparation has two sub-stages: gathering information through specific marketing, engineering, organizational, and financial studies; and systemizing this information in monetary terms using a financial study. The latter provides financial information on aspects not covered in other studies, such as financing and taxes.
Technical Study
The technical study quantifies investment and operating costs. It determines capital, labor, and material resource needs for commissioning and operation.
Determining Capital Needs
Seed Money: Early-stage funding often obtained from internal sources or grants due to investor reluctance.
Start-up Capital: Short-term operating capital for setup and longer-term capital for resources. Attracting investors is challenging. Banks are often hesitant due to high risk, but some rural development banks and credit institutions may help. Investors may provide capital based on a sound business plan demonstrating market acceptance, high ROI, and management ability.
Working Capital: Short-term funding for current assets (inventories, accounts payable, and cash), usually obtained from banks and trade creditors. Easiest to obtain for viable enterprises.
Long-Term Funding: Finances fixed assets (buildings, machinery) through long-term liabilities and owner funds. Profitable companies may encourage reinvestment for increased production.
Determining Labor Needs
A capable human factor is required to meet production requirements.
Indirect labor, included in the indirect manufacturing cost budget, should be distributed across production stages to maximize worker capacity.
It consists of:
- Diverse personnel
- Required hours
- Number of quarter-hours
- Cost per unit hour
Construction Expenditure Budget
Estimates directly or indirectly involved in all production stages are expenses charged to product cost.
Sustainability
- Required man-hours
- Machinery and equipment operation
- Stock of accessories and lubricants
Comments: Coordinate this budget with previous budgets to avoid unnecessary, irreversible expenses.
Determining Raw Materials, Supplies, and Overhead
Cost determination differs for production, trade, and service companies. Allocating fixed costs is challenging. First, determine raw material, input, and labor production costs per product. Then, distribute financial costs, overhead, administrative costs, and other expenses (typically monthly) to obtain the total unit cost per product.