UNIT 2: PROJECT PLANNING AND APPRAISAL

Contents
2.0 Aims and Objectives
2.1 Introduction
2.2 Project Appraisal by Financial Agencies
2.3 What is Project Appraisal
2.4 Steps and Methodologies for Appraisal
2.4.1 Application Form
2.4.2 Scrutiny of Standard Application Form
2.4.3 Site Inspection
2.5 Summary
2.6 Answer to Check Your Progress Exercise

2.0 AIMS AND OBJECTIVES

The main objectives of this unit is

- to understand what project appraisal means
- to understand the steps taken to appraise project
- to understand the methodologies used to appraise project.

2.1 INTRODUCTION

In order for a project to be viable it has to gone through a series of rigorous testing. This is
basically done at an appraising stage of project lifecycle. Market, technical, institutional
feasibility, commercial profitability and social cost benefit analysis which are pre requisite for
an investment project should, therefore, be defined and critically examined on the basis of
alternative solution already reviewed.

2.2 PROJECT APPRAISAL BY FINANCIAL AGENCIES

Financial institution and development banks are looked upon as engines of economic
development. They endeavor to accelerate the pace of economic growth in conformity with

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national objectives, plans and priorities. in a situation where resources are scarce and demands
for funds for all type of project are there, project appraisal helps in selecting projects worth
financing.

An entrepreneur conceive the idea of setting up a project after an assessment which indicates
that there is demand for the project to be set and the profit margin would be attractive. After
identifying the project, he has to do certain preparatory work. The stage is not ripe for the
applicant to approach financial institution for financial assistance.

2.3 WHAT IS PROJECT APPRAISAL?

Appraisal can be defined as a second outlook at the project report by a person who is no way
involved in its preparation. It helps in taking an entirely independent view of the project.
Appraisal is comprehensive and systematic review of all aspects of a project. The main
objective of project appraisal is to provide a rule for deciding whether to accept or reject a
project.

Appraisal highlight weak areas in the project with the ultimate objectives of strengthening
them adequately so as to ensure final success of the project. Appraisal will improve and
revamp the project with the cooperation of the promoter.

Appraisal of a project is done by a team of officers and they take the prime responsibility in
regard to the conclusions emanating from the appraisal. Appraisal is also a joint exercise by
the promoters and the financing institution. And the appraisal should be made within a time
bound. This is because any delay ness in implementation will distort profitability projection
and makes success of the project a very difficult task.

Appraisal involves a careful checking of the basic data, assumptions and methodology used in
the project formulation, review of the work plan, cost estimates and proposed means of
financing, an assessment of organizational and management aspects and finally the financial,
economic and social benefits expected from the project.

Appraisal, however, does not set down a categorical statement of the long range prospects of
the project. It only provides broad guidance to the financial institution to form its judgment

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regarding the future profitability and prospects of a particular project and to workout terms
and conditions for its assistances.

2.4 STEPS AND METHODOLOGIES FOR APPRAISAL

2.4.1 Application Form

The financial institutions (banks) require that an entrepreneurs seeking financial assistance
should furnish detailed information about the project in a prescribed form. The form is
sufficiently comprehensive and covers all-important aspects of a project. It is so designed that
an analysis of the information therein should enable the financial institution to judge the
viability of the project. It is essential that a proper guidance is provided to the promoters for
completing the application forms.

2.4.2 Scrutiny of Standard Application Form

First step in detailed appraisal is in depth study of information submitted by the entrepreneur.
The main issue that the appraiser have to look into are:
 adequate data has been furnished against every item
 information furnished under several items could be cross checked
 both in scrutiny of the preliminary information and the processing of the application,
personal discussion between the official of the bank and representatives of the
borrowing concerns are both necessary and desirable. They help to reduce avoidable
correspondence and thus facilitate an expeditious disposal of the application
 clarification/additional information called for whether necessary.

A project is likely to receive favorable consideration and detailed appraisal is taken if:
 it has priority according to governmental guidelines
 the promoters inspire confidence
 the technology to be adopted is well proven
 the product manufactured have market potential
 the project cost is not unreasonable high
 the promoter's contribution is not unduly low and

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  profitability estimates are conservative and indicate repayment of proposed
institutional loan within, say, about 10 years

A proposal is rejected without detailed appraisal if it has some of the following features.
 Banker's report on the promoter is not satisfactory
 If promoter are reported to have indulged in illegal and anti-social activities e.g.,
smuggling, foreign exchange violation, income tax evasion
 If financial position of the promoter company is not satisfactory
 If the industry to which the promoters belong has low priorities or included in the
negative list in government guidelines
 Cost of the project is unduly high
 Promoters contribution is unusually low (i.e., when the promoter has low capital in the
eye of the banker)
 When location of the proposed unit has apparent disadvantage e.g., far from the source
of raw material, market
 If second hand equipment has to be acquired which is too old (most of the time banks
don't finance those project which uses obsolete machine, equipment, etc)
 Availability of raw material in terms of quantity and quality is doubtful.
 When products to be manufactured don't have sufficient market potential
 When there exist difficulty in understanding the technological know how etc.

While preferences will be given to those project which

 would utilize any industrial wastes or agricultural surplus as raw material
 are export oriented or import substitute
 are employment oriented
 are located in a specified backward or loss backward area
 would help in setting up of ancillary small scale units.

After an exhaustive investigation on the standard application form the third step in project
appraisal will be site inspection.

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2.4.3 Site Inspection
Third step in project appraisal is site inspection by appraisal team consisting of technical and
financial offices. Inspection team should pay particular attention to assessing suitability of site
by ascertaining its distance from transport, source of raw material, market for end products,
timely availability of utilities like power supply, water supply, telecommunication etc.

Effluent disposal arrangement should be carefully scanned to ensure the safety and cleanness
of the environment. Source of skilled and unskilled labor and availability of social
infrastructure like: residential accommodation, school, college, hospital near the site may be
looked into.

During site inspection, the inspection team should discreetly collect market reports on the
promoters their financial strength, credibility and capacity. Care should, however, be taken
that such enquiries do not result in any embarrassment (disappointment) for the promoter.

Generally a visit to the site of the project would give the offices of the financing institution. A
visual picture of the location of the site and will enable a better appreciation of the other
relevant question such as expenditure on development of land, arrangements for water supply,
power etc.

Check Your Progress Exercise

1. Who involves in appraising project proposal?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. What are the main issues that the appraisals have to look in appraising project
proposal?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. What is project appraisal?

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___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. When shall the appraisal team accepts and rejects a project proposal?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
5. What are the various factors that has to be taken in to consideration during site
selection?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2.5 SUMMARY

Financial institutions like banks are considered as the engine for the economic development of
one country. They accelerate development by injecting money to different project, which is
appraised by them.

Project appraisal involves in a careful checking of the basic data, assumption and
methodology used in the project formulation, review of the work plan, cost estimate and
proposed means of financing, an assessment of organizational and management aspects and
finally the financial, economic and social benefit expected from the project by a person or
organization who is no way involved in its preparation.

The basic steps in appraising projects involves in scrutinizing of application form, scrutinizing
of standard application form and site inspection.

2.6 ANSWER TO CHECK YOUR PROGRESS EXERCISE

1. Refer Sections 2.2 and 2.3

2. Refer Section 2.4.2
3. Refer Section 2.3

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4. Refer Section 2.4.2
5. Refer Section 2.4.3

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