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2. Project Formulation
What is Project Formulation?

Project formulation is the systematic process of transforming a project idea into a well-structured, feasible,
and actionable plan. It involves thorough analysis, planning, and evaluation to ensure the project’s success
before implementation.
When developing a new project—whether it’s constructing infrastructure, launching a business, or
introducing a product—an idea alone is insufficient.

Project formulation helps determine:

Feasibility: Whether the project is technically and practically possible.
Viability: Whether it is worth the investment in terms of time, cost, and effort.
Resource Planning: What steps, resources, and personnel are required.
Risk Management: Potential challenges and strategies to mitigate them.

A well-formulated project:
Ensures Practicality – Confirms that the project can be executed successfully.
Optimizes Resources – Saves time, money, and effort by preventing poor planning.
Minimizes Risks – Identifies and addresses potential obstacles early.
Secures Support – Gains approval and funding from stakeholders, investors, and communities.

Quotes from Experts

"Project formulation refers to a series of steps to convert an idea or aspiration into a feasible plan of
action." – B.B. Goel
"It shifts planning from an institutional base to a rational and structured approach." – G. Myrdal

Aspects of Project Formulation

1. Pre-Project Evaluation – Assessing economic, technical, and social feasibility.
2. Interdisciplinary Collaboration – Requires experts from economics, engineering, finance, management,
and environmental science.
3. Structured Planning – Converts abstract ideas into clear, actionable steps.
Project formulation is the critical first step in project success. Without proper assessment and planning, even
the most promising ideas can fail due to poor execution, financial miscalculations, or unforeseen risks. A
well-formulated project sets the foundation for smooth implementation and goal achievement.

Why Project Formulation is Important

Project formulation is an essential step in project management that determines whether an idea can evolve
into a practical and successful venture. It serves as a bridge between raw inspiration and structured
execution. Without formulation, projects risk being vague, unfeasible, or destined to fail. Let us explore its
importance through key aspects, each discussed in detail for clearer understanding.
1. Reality Check
Project formulation offers a reality check by thoroughly testing if a project is technically, financially, and
socially feasible. It helps answer critical questions such as:
 Can this project be practically implemented with available technologies?
 Will the project be economically viable and profitable?
 Are the social and environmental consequences manageable?

Without this, organizations may waste resources on dreams that look good on paper but cannot survive in
the real world.

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2. Risk Reduction
Every project faces uncertainties—whether technical, financial, or regulatory. Formulation helps in
identifying risks early so that strategies can be developed to mitigate them or adjust the plan. This
proactive approach prevents surprises during project execution, reducing chances of delays, cost overruns, or
failure.
 Identifies possible obstacles.
 Designs solutions in advance.
 Helps decide whether to proceed or abandon the idea.

3. Resource Optimization
Resources like money, materials, manpower, and time are limited in every project. Project formulation
ensures that these are allocated efficiently:
 Prevents wastage by estimating accurate requirements.
 Helps in creating realistic budgets and timelines.
 Ensures that the right resources are available at the right time.

Proper formulation prevents overcommitment of resources, which is vital for project sustainability.
4. Building Stakeholder Confidence
For any project to gain support—be it from investors, governments, or local communities—it must be well-
formulated. A comprehensive project formulation:
 Builds trust and credibility.
 Attracts necessary funding and approvals.
 Aligns expectations among all parties involved.

When stakeholders see a clear, data-backed plan, they are more likely to commit resources and provide
support.
5. Provides an Implementation Roadmap
Formulation results in a master plan or blueprint for project implementation. This includes:
 Step-by-step phases of execution.
 Defined roles and responsibilities.
 Timelines and key milestones.
 Performance measurement indicators.

This roadmap helps keep the project on track, ensuring that everyone knows their tasks and deadlines.
6. Adaptability and Flexibility
Since no project goes exactly as planned, formulation includes contingency plans that allow for flexibility:
 Teams are prepared to handle unexpected challenges.
 Alternative strategies are already in place if things don't go as expected.

This makes the project robust against uncertainties.

7. Establishes Success Metrics
Project formulation defines what success looks like for the project. It sets:
 Clear objectives and goals.
 Criteria for evaluating progress and outcomes.
 Metrics to assess whether the project delivers the expected value.

Without these metrics, it is difficult to know if a project has truly succeeded or failed.

In summary, project formulation is not just a preparatory step—it is the foundation for project success. It
converts ideas into actionable plans, minimizes risks, optimizes resource use, and ensures that projects align
with economic, social, and environmental realities. It also helps gain stakeholder trust and provides a
flexible yet structured path for implementation.

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Who is Involved in Project Formulation?

Project formulation is a collaborative and interdisciplinary effort, requiring the expertise of professionals
from various fields. Since projects are complex and multifaceted, no single person can address all the
technical, financial, social, and environmental dimensions involved. Therefore, specialists from different
domains work together to ensure that the project is thoroughly evaluated from all necessary angles before
implementation begins.
Here are the key participants typically involved in project formulation:

1. Economists
Economists play a critical role in assessing the economic viability and broader impact of a project. They:
 Conduct cost-benefit analyses to ensure that the project yields greater benefits than costs.
 Evaluate the macroeconomic effects, such as job creation, contribution to GDP, or impacts on
inflation and trade.
 Forecast market trends to determine the demand and supply dynamics related to the project.
Their input ensures that the project makes economic sense not just for investors but also for society at large.

2. Engineers and Technical Experts

Engineers are responsible for evaluating the technical feasibility of the project. They:
 Assess whether the proposed technology and methods can be effectively applied.
 Design project structures, models, and processes.
 Identify potential technical challenges and propose solutions.
Their expertise ensures that the project can be built or implemented with current technological capabilities
and within technical constraints.

3. Financial Analysts
Financial analysts examine the financial aspects of the project. They:
 Prepare detailed cost estimates for each phase of the project.
 Identify sources of financing, such as loans, equity, or grants.
 Assess financial risks and returns on investment.
 Develop funding strategies and financial sustainability plans.
Their role is crucial in ensuring that the project is financially sound and capable of attracting investors or
funding agencies.

4. Environmental Experts
Environmental specialists assess the project’s impact on nature and ecosystems. They:
 Conduct Environmental Impact Assessments (EIA) to evaluate potential environmental risks.
 Recommend mitigation measures to reduce pollution, habitat destruction, or resource depletion.
 Ensure that the project complies with environmental regulations and sustainability standards.
Their involvement is essential to ensure that the project is not only viable but also environmentally
responsible and sustainable.

5. Social Scientists and Community Planners

Social scientists analyze the social feasibility and community impact of the project. They:
 Study how the project will affect local populations, cultures, and social structures.
 Assess potential displacement, equity, and social inclusion issues.
 Engage with communities to gather feedback and ensure public acceptance and support.
Their input helps in designing projects that are socially beneficial and minimize negative impacts on people.

6. Legal Experts
Legal advisors ensure that the project complies with all laws, regulations, and contractual obligations.
They:
 Identify potential legal barriers or liabilities.

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 Ensure proper land acquisition, permits, and licenses.
 Draft and review contracts and agreements with stakeholders.
This helps in preventing legal disputes that could delay or derail the project.

7. Management and Project Planning Experts

Project managers and planning specialists contribute by:
 Designing the overall project plan, timelines, and resource allocations.
 Defining roles, responsibilities, and coordination mechanisms.
 Setting up risk management frameworks and monitoring systems.
Their expertise ensures that the project is organized efficiently and progresses in a structured and disciplined
manner.

8. Policy Makers and Government Officials (for Public Projects)

In public sector projects, government officials and policy makers are involved to:
 Align the project with national policies and development goals.
 Facilitate regulatory approvals and funding support.
 Ensure that the project addresses public interests and welfare.

In summary, project formulation is a team effort involving a diverse group of experts. Economists,
engineers, financial analysts, environmental and social experts, legal advisors, and project managers all
contribute their unique insights to create a comprehensive, viable, and well-rounded project plan. This
collaborative approach ensures that all technical, financial, social, legal, and environmental aspects are
carefully considered, making the project robust, sustainable, and socially acceptable.

Without this multidisciplinary participation, a project runs the risk of being incomplete, flawed, or
unsustainable in practice.

Steps in Project Formulation

Project formulation is a structured process designed to translate a project idea into a well-defined,
feasible, and implementable action plan. This process is vital because failure in any step can adversely
affect the success of the entire project. The formulation process involves several distinct but interconnected
steps, each playing a critical role in ensuring that the project is viable, sustainable, and beneficial. The main
steps in project formulation are:

1. Project Identification

The first step is Project Identification, which involves recognizing a problem, need, or opportunity that
requires intervention. This stage focuses on defining the objective by answering questions such as: what is
the problem? Who is affected? What outcomes are desired? A project can be identified by various entities,
including an individual entrepreneur, a government agency, an NGO, a financial institution, or a social
investment company. The identification process serves as the foundation because a wrongly identified
problem leads to an ineffective project, no matter how well-planned the later stages are. This phase ensures
that the project addresses a genuine need or demand, making it relevant and necessary.

2. Technical Analysis

Once a project is identified, the next critical step is Technical Analysis, which evaluates whether the project
can be practically executed from a technical perspective. This involves analyzing the location, availability
of raw materials, human resources, utilities, transportation, and technological aspects. The technical
analysis ensures that all physical and infrastructural requirements are adequately addressed to avoid

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technical failures during implementation.

Technical analysis is typically divided into two categories:

2.1. Input Analysis

Input analysis focuses on identifying the necessary inputs for the project, such as:

 Location: Selecting a project site should be done thoughtfully, considering accessibility,

proximity to raw materials and markets, and socio-economic factors. The location impacts costs
and operational efficiency.
 Size and Cost of Land: Availability and affordability of land are crucial. Too small a land may
limit expansion; too costly land increases investment burden.
 Raw Materials: The project must have steady access to raw materials at a reasonable price.
Supply chain reliability directly affects production continuity.
 Utilities: Reliable power, water, natural gas, and other utilities are essential for uninterrupted
operations.
 Manpower: Availability of skilled and unskilled labor influences productivity and quality.
Recruiting qualified personnel must be feasible.
 Transport Facilities: Efficient transport links reduce logistics costs and delivery times.
Transportation costs impact overall project expenses.
 Incentives & Concessions: Government incentives like tax breaks, subsidies, or land grants can
improve project viability.
 Environmental Considerations: Ensuring that the project’s activities are environmentally
sustainable helps avoid legal issues and community opposition.
 Climate & Natural Hazards: Climate factors (temperature, humidity) and risks like floods or
earthquakes must be considered, as they may affect operations and longevity.
 Technological Aspects: Choosing technology that is cost-effective, easy to maintain, and
environmentally friendly enhances efficiency and sustainability.

2.2. Demand & Supply Analysis

This analysis examines whether there is sufficient market demand for the products or services that the
project intends to produce. It investigates market size, customer preferences, competition, and supply
capabilities. Common methods used in demand and supply analysis include:

 Survey of Buyers’ Intention: Directly asking potential customers about their willingness to buy
the product helps gauge demand.
 Composite of Sales-Force Opinion: Sales teams provide insights based on market interactions
and customer feedback.
 Expert’s Opinion: Specialists with market knowledge can predict trends and customer
acceptance.
 Market Test Method: Testing the product in a limited market area to observe consumer
response before full-scale production.
 Statistical Method: Using historical data and models to forecast demand and supply balance.

This step ensures that the project is market-oriented and not just technically sound but also commercially
viable.

3. Feasibility Study

Feasibility study is a critical evaluation process that assesses whether a proposed project is viable,

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practical, and worthwhile before committing significant resources. It acts as a reality check, determining if
the project can succeed from multiple perspectives such as economic impact, financial return, commercial
potential, and managerial capacity. Conducting a thorough feasibility study reduces the risk of failure by
identifying potential problems early and helping decision-makers make informed choices.

Feasibility study is often divided into four main categories:

A. Economic Feasibility Study

Economic feasibility looks at the project’s impact on the wider economy, especially for public or
government projects where societal benefits are important. It assesses how the project will contribute to
national or regional development beyond mere profitability. Key considerations include:

 Net National Income Addition: The project should ideally increase the overall income of the
country or region by generating wealth, increasing productivity, or raising living standards.
 Employment Effect: Projects that create new jobs or improve employment rates contribute
positively to the economy. The study evaluates both direct and indirect job creation.
 Income Distribution: It assesses how the economic benefits will be shared among different social
groups, regions, or communities. Projects that promote equitable development are preferred.
 Foreign Exchange Effects: The study considers whether the project will reduce imports, increase
exports, or generate foreign currency earnings, which strengthens the country’s balance of payments.
 Infrastructure Impact: The project’s demand on existing infrastructure like roads, power, and water
is evaluated. If the project strains infrastructure, it might incur additional costs or reduce benefits.
 Environmental Considerations: Sustainable projects that minimize pollution, conserve resources,
and protect ecosystems score better in economic feasibility.

The economic feasibility study helps ensure that the project aligns with broader development goals and
provides societal value beyond private profits.

B. Financial Feasibility Study

Financial feasibility focuses on the monetary aspects of the project, assessing whether it can generate
sufficient returns to justify the investment. It answers the question: “Is the project financially viable and
sustainable?” The key elements include:

 Capital Cost: Estimation of the total upfront investment required for land, machinery, buildings, and
other fixed assets.
 Working Capital Requirement: Funds needed for day-to-day operations such as inventory, wages,
and utilities.
 Operating Costs: Recurring expenses to keep the project running smoothly, including raw materials,
labor, maintenance, and administration.
 Taxes and Depreciation: Consideration of government levies and the accounting value of asset
depreciation.
 Profitability: Projected revenues compared with total costs to determine expected profits over time.

C. Commercial Feasibility Study

Commercial feasibility examines the market-related aspects of the project to confirm that the product or
service will be accepted and demanded by customers. It goes beyond financials to consider social and
behavioral factors affecting sales. Key elements include:

 Market Size and Segmentation: Understanding the total market and dividing it into segments by
income, location, age, or preferences.

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 Target Customer Analysis: Studying demographics, income levels, buying habits, cultural and
religious beliefs that influence purchasing behavior.
 Price and Distribution Channels: Determining competitive pricing and efficient ways to reach
customers, such as wholesalers, retailers, or direct sales.
 Competition: Analyzing existing competitors’ strengths, weaknesses, and market shares.
 Political and Social Environment: Considering political stability, regulations, and public sentiment
that can affect market entry and growth.

Commercial feasibility ensures the project’s output matches consumer needs and market conditions,
reducing the risk of poor sales or product rejection.

D. Managerial Feasibility Study

Managerial feasibility evaluates the capacity and readiness of the project team and organization to
manage and execute the project effectively. It asks: “Do we have the right people and structure to deliver
this project successfully?” Factors considered include:

 Experience and Competence: Assessing if the project manager and key personnel have relevant
experience and skills.
 Organizational Structure: Reviewing whether the current or proposed organizational setup can
support the project’s scope and complexity.
 Leadership and Decision-Making: Evaluating the project director’s ability to lead, coordinate
teams, and make timely decisions.
 Management Systems: Availability of planning, monitoring, reporting, and risk management
systems.
 Human Resource Availability: Ensuring sufficient and qualified personnel are available or can be
recruited.

Strong managerial feasibility minimizes the risk of project delays, cost overruns, and operational failures by
ensuring capable leadership and administration.

In essence, the feasibility study acts as a comprehensive health check for a project, combining
economic, financial, commercial, and managerial insights to ensure the project is robust and has a high
probability of success. Skipping or inadequately performing this step exposes projects to unforeseen risks,
wasted resources, and failure.

4. Appraisal of Project

The final step is the Appraisal of the Project, where all findings from the previous steps are critically
evaluated by decision-makers, including sponsors, investors, and regulatory bodies. The appraisal phase
involves a holistic review of technical, financial, economic, commercial, environmental, and
managerial aspects to approve or reject the project proposal. A positive appraisal leads to project approval
and the beginning of implementation, while negative findings may require re-formulation or abandonment of
the project idea.

In conclusion, project formulation is a multi-step, multidisciplinary process essential for ensuring the
success and sustainability of any project. Each step—from identification to appraisal—builds on the
previous one to construct a robust, well-evaluated, and practical project plan. Neglecting any of these
stages can result in project delays, cost overruns, or outright failure. A well-formulated project not only
ensures operational success but also delivers financial profitability, social benefits, and environmental
sustainability.

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Tools of financial feasibility study:
Financial feasibility study and investment decision are carried out on testing various tools of financial
feasibility study. These tools act as indicator of investment decision. Tools of financial feasibility study are
as follows:
(1) Pay Back Period (PBP);
(2) Net Present Value (NPV);
(3) Benefit Cost Ratio (BCR);
(4) Internal Rate of Return (IRR); and
(5) Financial ratios.

Capital Budgeting:
Long term investment represents sizable outlays of funds that commit a firm to some course of action.
Consequently, the firm needs procedures to analyze and properly select its long term investment. It must be
able to measure cash flows and apply appropriate decision n techniques. At time passes, fixed assets may
become obsolete at this point financial decision may be required. Capital budgeting is the process of
evaluating and selecting long term investments that are consistent with the firm’s goal of maximizing
owner wealth. Firms typically make a variety of long term investments but the most common for the
manufacturing firm is in fixed assets, which include property (land), plant, and equipment. These assets,
often referred to as earning assets, generally provide the basis for the firms earning power and value.

Common techniques of capital budgeting:

When firms have developed relevant cash flows, they analyze them to assess whether a project is acceptable
or to rank projects. A number of techniques are available for performing such analyses.

(1) Pay Back Period (PBP): Pay back periods are commonly used to evaluate proposed investments. The
payback period is the amount of time required for the firm to recover its initial investment in a project,
as calculated from cash inflows. In case of an annuity, payback period can be found by dividing the
initial investment by the annual cash inflows. For a stream of cash inflows, the yearly cash inflows must
be accumulated until the initial investment is recovered. Al though popular, the payback period is
generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly
consider time value of money.

When payback period is used to make accept-reject decision the flowing decision criteria are to be
followed:
 If the payback period is less than the maximum acceptable payback period, accept the project.
 If the payback period is greater than the maximum acceptable payback period, reject the project.

The length of maximum acceptable payback period is determined by management.

(2) Net Present Value (NPV): Net present value (NPV) gives explicit consideration to the time value of
money; so it is considered a sophisticated capital budgeting technique. It is a sophisticated capital
budgeting technique, found by subtracting a projects initial investment from the present value of its cash
inflows discounted at a rate equal to the firms cost of capital.

NPV= Present value of cash inflows − initial investment.

When NPV is used to make accept reject decisions, the decision criteria are as follows:
 If the NPV is greater than Tk. 0, accept the project.
 If the NPV is less than Tk. 0, reject the project.

(3) BCR (Benefits Cost Ratio): When present value of return is divided by present value of investment
than we get BCR, BCR more than 1 (one) creates acceptable criteria, other hand less than one creates
rejection criteria.

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BCR =

(4) Internal Rate of return (IRR): Internal rate of return (IRR) is probably the most widely used
sophisticated capital budgeting technique. Internal rate of return (IRR) is the discount rate that equates
the (NPV) of an investment opportunity with Tk. 0 (Because present value of cash investment equal to
zero)

When IRR is used to make accept reject decisions, the decision criteria are as follow:

 If the IRR is greater than the cost of capital, accept the project.
 If the IRR is less than the cost of capital, reject the project.

These criteria guarantee that the firm earns at least its required return. Such an outcome should determine or
enhance the market value of the firm and therefore the wealth of its owner

(1)Pay Back Period

(a) Annuity or even cash inflow:

PBP =
NCO = Net cash outlay or Total investment
NCB = Net cash benefit or Annual return

(b) Stream cash inflow:

PBP =A+ Where

A = The year in which accumulation
cash inflow is nearer to NCO
C =Cumulative cash inflow of the year A
D =Cash inflow of the year following year A.
Problem-1
Suppose project X requires total amount of investment Tk 50,000 and yearly return is Tk 10,000. Calculate
payback period.

Solution:
We know, payback period in case of annuity cash inflow as-

PBP =
=
= 5 years (Ans.) Where
NCO = Net cash outlay
NCB = Net cash benefit

Problem-2
Project ‘X’, Net cash outlay (NCO) = Tk. 20,000
Yearly cash inflows are as follows

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Year Cash inflow
1 Tk 2000
2 6000
3 11000
4 4200
5 700
Calculate PBP.
Solution:
We know PBP under mixed cash inflow:
PBP = A +
Where
A = Year at which cumulative cash inflow is near at NCD
C = Cumulative cash inflow of year A
D = Cash inflow of the year following year A.

Calculation table
Year Cash inflow Cumulative cash
Inflow
1 Tk 2000 Tk 2000
2 6000 8000
3 =A 11000 19000 = C
4 4200 = D 23200
5 7000 30200

PBP = 3 +

=3+
= 3+0.24
= 3.24 years. (Answer)

(2) Net present value

Calculation of present value = N

Where,
F = Future single received
i = Discount rate or Interest rate
N = Number of interest period
Suppose, F = Tk. 1.0, i = 10%, N = 1

PV =

=
= 0.909

Problem-3
Project ‘T’ requires NCO Tk. 100,000, discount rate @ 10% and yearly cash inflows are as under:

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Year Cash inflow
1 Tk 20000
2 25000
3 45000
4 40000
5 25000
Calculate NPV.
Solution:
Calculation table of NPV of project-T
Year Cash in flow present value of Tk 1 Present value of cash
@ 10% inflow @ 10%
1 Tk 20,000 0.909 Tk 18,180
2 25,000 0.826 20,650
3 45,000 0.751 33,795
4 40,000 0.683 27,320
5 25,000 0.621 15,525
Total Tk 1,50,000 Tk 1,15,470

We, know,
NPV = Present value of return − Present value of investment
= Tk 1,15,470 – 1,00,000
= Tk 15,470 (answer.)

Comment: Since NPV is positive, project ‘T’ is feasible project. So investment decision can be made.

(3) Benefit cost ratio (BCR)

BCE =

= (Information from problem-3)

= 1.15470

Comment: Since BCR is 1.15470 (more than 1) so project is feasible, so investment decision can be
undertaken. Tk 1 investment results in 1.15470 received.

Problem-4: Project-‘K’
NCO = Tk. 100000, total benefits = 175000, project life = 5 years, discount rate = 10%. Calculate BCR.
Total investment and benefit receive given below:
Year Total cost/investment Total benefit
1 Tk 50000
2 50000
3 Tk 40000
4 60000
5 75000

Solution:
BCR Calculation table of project ‘K’

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1 2 3 4 5 6
year Total cost/ Total Present value of Tk Present value of total present value of
Investment benefit 1 @ 10% cost (1) × (4) benefit (3)×(4)
1 Tk 50000 0.909 45450 -
2 50000 0.826 41300 -
3 Tk 40000 0.751 - 30000
4 60000 0.683 - 40980
5 75000 0.621 - 86575
Total Tk 86750 Tk 117595

BCR =
= 1.36 (Approximately)
Comment: Tk 1 investment results in 1.36 benefits received so investment decision can be made.

(4) Internal rate of return (IRR)

IRR =
Where
LDR = Lower Discount Rate
HDR = Higher Discount Rate
NPV = Net Present Value
Problem-5: Project-‘Y’
NCO = Tk. 100,000, project life = 4 years.
Cash inflow on the table
Year Cash flow
1 10,000
2 4000
3 4000
4 4000
Solution:
Calculation table of IRR
1 2 3 4 5 6
2×3 5×6
Year Cash PV of Tk 1 at LDR PV of cash PV of Tk 1 at PV of cash
flows discount rate @ 8% flows HDR discount flows
rate @ 10%
0 (10000) 1.00 (10000) 1.00 (10000)
1 4000 0.926 3704 0.909 3636
2 4000 0.857 3428 0.826 3304
3 4000 0.798 3176 0.751 3004
308 -56

IRR =

=
=
= 8+ 1.69
= 9.69 (Answer)

Comment: If rate of return of that project is 9.69 or more than project is acceptable.
(5) Ratio Analysis:

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Ratio analysis involves the methods of calculating and interpret financial ration in order to assess the firms
performance and status. The inputs to ratio analysis are the firm’s income statement and balance for the
period to be examined. Ratio analysis is used to compare perms performance and status to that of other firm
or to itself over time. Financial ratios can be divided into four basic group or categories: liquidity ratios;
actively ratios; debt ratios and profitability ratios.
Profitability ratios: Measure return
Liquidity, activity and debt ratios: Measure risk

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