Project AppraisalProject Appraisal

Critical examination of the project from all Critical examination of the project from all aspects is called appraisal. aspects is called appraisal.

Analysis of prospective costs and benefits that Analysis of prospective costs and benefits that leads to desirability for committing resources.leads to desirability for committing resources.

It is carried out at two stages:It is carried out at two stages: Internal AppraisalInternal Appraisal External AppraisalExternal Appraisal

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ASPECTS OF PROJECT APPRAISAL

Social Aspects Economic Aspects Environmental Aspects Financial Aspects Administrative/Management Aspects Commercial Aspects Technical Aspects

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Preliminary StepsPreliminary Steps Read the document thoroughlyRead the document thoroughly Check the completeness of the documentCheck the completeness of the document Are the PC-I & PC-II prepared on prescribed formatAre the PC-I & PC-II prepared on prescribed format Cost estimates are attached?Cost estimates are attached? Accompanied by drawings, maps etc.Accompanied by drawings, maps etc. Are the PC-I/PC-II provided in sufficient numbersAre the PC-I/PC-II provided in sufficient numbers Check Signatures of concerned officersCheck Signatures of concerned officers Determine the sector to which the scheme will contributeDetermine the sector to which the scheme will contribute Determine the project’s contribution to the sector Determine the project’s contribution to the sector

objectivesobjectives Mark problems mentioned in the documentMark problems mentioned in the document Mark objectives mentioned in the document Mark objectives mentioned in the document Compare marked problems with the objectives for Compare marked problems with the objectives for

establishing cause and effect relationship establishing cause and effect relationship

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TECHNICAL ASPECTS The technical aspects related to the following sectors as well as the social aspects have already been covered under the project document.

Engineering; Agriculture Forestry Fisheries; Health; Education; I.T Infrastructure Social Administrative/Management

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COMMERCIAL ASPECTS• Arrangements for supply of inputs and marketing

the projects output.• Effective demand at a reasonable price.• Where will the products be sold?• Is the market large enough to absorb the new

production without affecting the price?• If the price is likely to be affected, by how much?

Will the project still be financially viable at the new price?

• Is the product for domestic consumption or for export?

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FINANCIAL ASPECTS• Analysis encompass the financial effects of

the proposed project.• Relates purely with finances and revenue

generation.• Based on internal rate of return (IRR)

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ECONOMIC ASPECTS

• Determination of the projects contribution to the development of economy.

• Justification of investing scarce resources to the project.

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ENVIRONMENTAL ASPECT• A specific concern is that those who enjoy the fruits

of economic development today may be making future generations worse off by excessively degrading the earth’s resources and polluting the earth’s environment.

• A general principal of sustainable development is that current generations should meet their needs without compromising the ability of future generations to do the same.

• Common applications include valuation of damage due to soil erosion, deforestation ,air and water pollution. For environmentally related health risks, income foregone because of illness, or premature death can be used to measure welfare losses.

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Concept of Time Value of Money

• The cost & benefits of a project occur at different points of time depending upon the life of the project.

• The value of money changes over time, as such value of costs & benefits would depend upon the time of their occurrence.

• To compare the value of resources at different points of time, apply the compounding and discounting techniques.

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Presentation of Results

Discounted Analysis:

1. Benefits Cost Ratio (BCR)

The ratio of the present value (at an appropriate discount rate) of benefits and costs. A project is accepted if BCR>1.

2. Net Present Value (NPV)

The difference between the present value(at an appropriate discount rate) of benefits and present value of costs. A project is accept if NPV>0 and rejected if NPV<0.

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3. Internal Rate of Return (IRR)

That IRR is a discount rate which just equates discounted benefits to discounted costs. If IRR exceeds from the discount rate, the project is accepted (otherwise rejected).

IRR = Lower + Difference x ( NPV at Lower Discount Rate) discount between two (Sum of NPVs at two Discount Rates (signs ignored) rate discount rates

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UNDISCOUNTED ANALYSIS

Break-Even Analysis:The break even point is the minimum capacity utilization beyond which a firm starts making profit from its operation.

PAY-BACK PERIODThe pay back period is the length of time required to recover the investment.

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LIMITATIONS OF THE PROJECT APPRAISAL- Quality of project analysis depends on the quality of

data and forecast made about costs and benefits. Over-estimation of benefits and underestimation of costs is quite common to get the project approved.

- In view of the uncertainty about the future it is impossible to quantify completely the risks.

- Project analysis is a partial analysis where it is assumed that project will not change the macro economic variables.

- It is a useful device where benefits can be quantified.

- Project analysis is useful when there is a definite starting and finishing points.

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- Project analysis is a useful tool only if major part of benefits are quantifiable. In cases where non quantifiable externalities (e.g. job creation, regional development, development of skill, transfer of technology) are substantial, project analysis becomes less formal.

- There is a conflict of evaluation in project analysis. Political, social, economic, financial valuation, most often are conflicting.