Project Appraisal

Critical examination of the project from all

aspects is called appraisal.

Analysis of prospective costs and benefits that

leads to desirability for committing resources.

It is carried out at two stages:

Internal Appraisal

External 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 Steps
Read the document thoroughly
Check the completeness of the document
Are the PC-I & PC-II prepared on prescribed format
Cost estimates are attached?
Accompanied by drawings, maps etc.
Are the PC-I/PC-II provided in sufficient numbers
Check Signatures of concerned officers
Determine the sector to which the scheme will contribute
Determine the projects contribution to the sector
objectives
Mark problems mentioned in the document
Mark objectives mentioned in the document
Compare marked problems with the objectives for
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 earths resources and polluting the
earths 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 PERIOD
The 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.

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