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QUES NO. 1: ECONOMIC VIABILITY OF ANY PROJECT SHOULD BE IN CONFORMITY WITH THE GOVERNMEN\u2019S GOAL TO ACHIEVE EQUIATABLE DISTRIBUTION OF INCOME \u2013 ELUCIDATE
Ina any country\u2019s economy, developmental activities are needed to sustain growth and to ensure overall prosperity of the nation and well being of all its citizens. The government formulates, directs and guides the destiny through various means. It frames policies to address growth and overcome poverty and to have equitable distribution of income among various strata of society. The documentation of the policy is through identification of areas where fresh investments are needed, devising investment methods and paving the way for different agencies capable of undertaking long-term & short-term financing depending on their structure and strength. The government also draws the core policy wherein prosperity can be perceived for overall development and equitable distribution of income.
The project has to generate an acceptable rate of return, which adequately covers your cost of capital. The expected rate of return depends on the risk profile of the project. In a rational economic world, nobody implements a project to make losses. In other words net present value has to be positive if you discount the cash flows by the desired rate of return.
Many a time plants may be viable economically and financially but would be socially undesirable. An example would be dyes units, which have mushroomed around Ahmedabad. These are polluting and generate effluents not acceptable to the society and environment. In the last 5 years, India is slowly becoming environment conscious and friendly. So using hazardous chemicals or polluting industries may not get the necessary clearances. For instance, the state government has ordered closure of all dyes units in Gujarat unless suitable effluent treatment is implemented.
Project proposals should be derived from, and placed in the context of, broader development objectives. These objectives may be explicitly stated in a government plan document, or implicitly given through a public investment program. A statement should be given of the main development objectives of a country to which a proposed project will contribute.
Many investments will work well only if there are complementary investments in related sectors or activities. For example, for an irrigation project to raise agricultural output, the appraisal report must elaborate the necessary extra requirements for transport and processing. Projects to improve urban services should consider the capacity of the existing systems to deliver additional power and water. Potential constraints in supplies, whether they can be overcome, and the necessary timing of complementary investments, must be considered.
Because a project takes place within a given macroeconomic and sector context, an investment project can be seen as an incremental change to an existing structure. In fact, the context may be more important than the project itself. Moreover, a project that is financially sound within one sector and macroeconomic context may be financially unsound in another. Thus policy changes may be as important as the physical investment to the achievement of development objectives.
To implement any project, the entrepreneur needs to carry out different types of feasibility studies. These feasibility studies evaluate all the risks and returns and tries to balance them and help the entrepreneur to finalize his plans.
transfer between geographical areas and cultures needs to be analyzed to understand productivity loss (or gain) due to differences. An entrepreneur should have the requisite number of technically capable people as well as technology required to set up and run the plant. The technology should be such that is can adapt to local conditions. Technology transfer from overseas often fails in this regard. The conditions in USA and America are quite different from India. Most parts of India are hot and dusty. Sophisticated process controls have known to fail. Therefore, knowledge and suitability to local conditions is very important.
Technical appraisal is basically concerned with the project idea / concept, encompassing various aspects like technology, design, lay-out of the plant as well as inputs and infrastructure facilities envisaged in / for the project and the problems likely to crop up, in various areas related with technical aspects.
Technical appraisal focuses upon appraising the likely technical gaps / grey areas or technical problems which can be broadly grouped under the following three phases:
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