Project Appraisal- Introduction

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 Project Appraisal
• Appraisal of a project is a comprehensive process
which involves detailed scrutiny of its management
aspects, product, capacity to be installed, technical
feasibility, appraisal of market aspects/commercial
viability, study of environmental and institutional
factors followed by financial appraisal

• Analyses the costs and benefits associated with a

proposed project
– to ensure rational allocation of scarce resources
– Evaluate the feasibility by using different project appraisal
techniques

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• It assess the feasibility of a project before
committing resources to it

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 2. Project Appraisal
• Project appraisal appraises the project if it is feasible in
terms of financials and other resources vis-à-vis
benefits
• It covers 5 major aspects of project:
– Market Appraisal
– Technical Appraisal
– Financial Appraisal
– Economic Appraisal
– Ecological Appraisal
• Outcome:
• A Feasibility report is prepared. It considers all these
issues prior to project adoption/selection

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 Market appraisal
• Two broad questions to be answered in
Market Appraisal–
– What would be the Aggregate demand?
– What would be the Market share of the project
under appraisal?

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 Market Appraisal
• Appraisal of existing and potential market – demand and
supply
• Domestic and International market
• Market share
• Past and current demand trends
• Past and current supply position
• Production possibilities and constraints
• Imports and exports
• Nature of competition
• Cost structure
• Elasticity of demand
• Consumer behaviour
• Distribution channels
• Administrative , technical and legal constraints
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 Technical Appraisal
• Engineering aspects
• Location
• Size
• Production process
• EOS

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 Technical Appraisal
• Preliminary tests and studies
• Availability of raw materials, power and other inputs
• Optimal scale of operations
• Choice of suitable production process
• Choice of machines and equipment
• Ensuring proper disposal of effluents and waste disposal
• Proper layout of plant and buildings
– Movement of men, material – cost increases
• Realistic work schedules
• Do you have social acceptable technology

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 Financial Appraisal

What all is involved in Financial Appraisal?

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• Financial criteria for evaluation of projects
– NPV (universally accepted)
– Internal Rate of Return
– Simple before/after tax rates of return
– Equivalent annual cost
– Payback period
– Discounted Payback period

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 Financial Appraisal
• Whether the project is financially viable?
– Servicing debt (whether the project is capable of
meeting debt requirements; raise loans, whether
project has capacity to repay loans; debt service
capability is analyzed by financial institutions)
• Performance parameters
• Financial ratios
• Worthwhile or not
– Meeting return expectations

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 Financial Appraisal
• Investment outlay and cost of the project
• Means of financing the project
• Cost of capital
• Projected capability
• Break-even point
• Cash flows of the project
• Whether investment worthwhile in terms of various
criteria- compute financial parameters –
• Projected financial position
• Level of risk
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 Economic Appraisal
• Also called - Social cost benefit analysis
– How the project is going to affect society at large
– Displacement, or employment opportunity, income
redistribution
– Hydel power project : people displaced
• Direct economic benefits and costs in terms of shadow
prices
• Shadow price vs market price –
– In LPP – shadow price of a constraint
• Implication is - What is contribution of increasing particular
resource level to the overall objective function
• E.g. What is the benefit of occupying a land to overall obj
function, is that benefit more than cost

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 Economic Appraisal
• Issues of greater concern to society at large
• Benefits and cost (in terms of shadow prices)
• Distribution of income in society
• Level of Savings and investment in society
• Self sufficiency, Employment And social order
• For global project- these issues become very
relevant

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• Impact of project on distribution of income in
society
– (in times of Social harmony , Social order, otherwise
social discontent, Amartya sen talking about social
order, removing poverty, all projects which bring
equitable distribution and reduce poverty)
• Impact on level of savings and investments in
society
– Some projects may motivate to save money . E.g NPS,

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• Impact on fulfillment of national goals
– Self sufficiency
• E.g. factory for making equipment which u were
importing
• ISROs program for missile development is a step
towards self sufficiency in India in the area of nuclear
weapons
– Employment generation
– Social order (gulf between poor and rich ->will
lead to social unrest and disorder)
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 Ecological Appraisal- Issues
• Major projects, such as these, cause
environmental damage:
– Power plants
– Irrigation schemes
– Industries like bulk drugs, chemicals and leather
processing
• To be assessed - Likely damage and the cost of
restoration
– E.g. throwing of effluents in river --- cost of
reprocessing these effluents

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 Key Issues in Project Analysis

Potential Market
Market Analysis
Market Share
Technical Viability
Technical Analysis
Sensible Choices
Risk
Financial Analysis
Return
Benefits and Costs in Shadow
Economic Analysis Prices
Other Impacts
Environmental Damage
Ecological Analysis
Restoration Measures
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• References:
• Refer Chapter 1 from RA
• Chapter 1 from PC

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