Project

Appraisal
 Definition

 Pre investment analysis of a project with a

view to determining the overall feasibility and
measures its investment worth which
provides a comprehensive review /assessment
of all aspects of project that lays the
foundation for implementation and evaluation
when it is completed.
ASPECTS OF PROJECT APPRAISAL

Market
appraisal

Financial
appraisal Project Technical
appraisal appraisal

Ecological Economic
appraisal appraisal
 Market appraisal
It is one of the major areas of introducing
of any products in market . In that case ,
must be considered this things before
launching in a market.
 What would be the aggregate demand
of the proposed product or service?
 What would be the market share of the
project under appraisal?
 Market appraisal
(Issues)
 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
 Market appraisal
(Issues

contd.)
 Consumer behavior
motivation, attitudes,
preferences, requirements
 Distribution
channels
 Technical appraisal

 Whether prerequisites for the success of

project considered ?
 Good choices with regard to location ,
size, process, machines etc.
 Technical appraisal
(Issues)
 Preliminary tests and studies
 Availability of raw materials, power and other
inputs
 Optimal scale of operations
 Choice of suitable production process
 Choice of appropriate machines
and equipment
 Effluents and waste disposal
 Technical appraisal
(Issues
contd.)

 Proper layout of plant and buildings

 Realistic work schedules
 Socially acceptable technology
 Economic appraisal
 Social cost –benefit analysis
 Impact on level of savings and investments
in society
 Impact on fulfilment of national
goals Self sufficiency
Employment
Social order
 Ecological appraisal

 Impact of project on quality of

 Air
 Water
 Noise
 Vegetation
 Human life
 Ecological appraisal
(contd)
 Major projects such as these cause
environmental damage
Power plants
Irrigation schemes
Industries like leather
processing,
chemical
s etc.
 Likely damage & the
 Financial appraisal

 Whether the project is financially viable ?

 Servicing debt
 Meeting return expectations
 Investment and phasing of the total cost
 Means of financing
 Break even point
 Cash flows in the project
 Financial appraisal
(contd)
 Investment worthwhile ?
Net present value
Internal rate of return
Pay back period
 Level of risk
 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
quite common to get the project approved.
is
- In view of the uncertainty about the future it is
impossible to quantify completely the risks.
- It is a useful device where benefits can be quantified.
- Project analysis is useful when there is a definite starting
and finishing points.
Project
Appraisal
Criteria
 Payback Period
The payback period: is the period of time that is required to recover the initial
investment.
The payback period is stated in terms of number of years.

Computation of Payback period:

The pay back period can be calculated in two different situations:
• When annual cash inflows are equal: In this case, the cash inflows being
generated by a proposal are equal for all time periods. The payback period can
be computed by dividing the initial cash outflows by the amount of cash inflows
per time period.

• When the annual cash inflows are unequal: When the cash inflows are unequal,
calculate the cumulative cash flows.
=> Calculate the cumulative inflows.
 Payback Period
Examples of equals inflows:
Problem (1):
A project requires an initial cash outflow of Ro.5, 00,000 and is expected to generate
cash inflows of Ro.1, 00,000 p.a.for 8 years.
Solution:
PB = Initial cash outflow/investment Constant Annual Cash inflow

PB = 5, 00,000 = 5 years 1, 00,000

b) 5th year are considered as profit. The period over and above the pay back period
(the 6th, 7th, 8th), year is ignored.
The pay back period need not be the whole number.
Problem (2):
• A project requires an initial cash outflow of Ro.5, 00,000 and is expected to
generate Cash Inflows of Ro.80, 000 p.a. for 8 years.
• Solution:
Payback Period
Payback Period
 Payback Period
The Decision Rule: the actual payback is
compared with a predetermined pay back, that
is, the pay back set by the management in terms
of the maximum period during which the
investment must recovered.

 If the pay back period is less than the

predetermined payback, then the project would
be Accepted; if not, it would be rejected.
Payback Period
 Net Present Value (NPV)
• The Net present value of a proposal is the sum of present values of all cash inflows
related to a proposal, less the sum of present values of all cash outflows associated with
a proposal.
• Thus, NPV is the sum of the discounted values of all cash flows pertaining to a proposal.
• The present value factors are multiplied to their respective net cash flows to arrive at
the present value of each net cash flow. When all such present values are added the
resultant figure is the Net Present Value.
• NPV of a project is the sum of the present value of all cash flows that are expected to
occur over the life of the project.
• It converts future values to present values
• Future values are usually net benefits from investment
• It compares sum of present values against investment
Net Present Value (NPV)
 Net Present Value (NPV)
The Decision Rule:
The NPV is positive accept the project
 Reject the project if the NPV is negative.
The positive NPV of a proposal signifies the
present worth of its inflows is more than the
present worth of its out flows. Thus; the NPV
represents the excess of benefits over the
costs in real term.
Net Present Value (NPV)
 Internal Rate of Return (IRR)
• The IRR of a proposal is defined as the discount rate at which the NPV of the proposal
works out to zero.
• IRR is the discount rate that equates present value of cash inflows with present value of
cash outflows.
• First find out the PV of cash outflows at chosen original discount rate. Depending upon
whether the NPV so arrived at positive or negative, another PV of cash inflows is
calculated by taking a discount rate that is higher or lower than the original rate. Now
two rate and two corresponding PVs.
• It is the discount rate which gives a net present value of zero.
• It is the discount rate which equates the present value of cash flow with the initial
investment.
Internal Rate of Return (IRR)
 Internal Rate of Return (IRR)
Example:
Internal Rate of Return (IRR)
 Internal Rate of Return (IRR)
The original discount rate can be chosen in a manner that can help us in reducing the
number of iterations. This can be done by following the steps.
• Calculate the pay back period. Incase the project generate the uneven streams of cash
flows, then the weighted average of cash inflows should be calculated. The original
investment must be divided by the weighted average cash flow to arrive at the artificial
payback period.
• Then, search for the PVAF factor as near as possible to the figure obtained as payback
period in the row that stands for the life of the project. The interest rates that
correspond to the PVAF value should be taken as the range with in which the IRR lies.

The Decision Rule:

The IRR is compared with the required rate of return. This rate is also known as the cut off
rate or the hurdle rate. A proposal may be accepted if its IRR is more than the required
rate.

If the IRR is less than Required rate, the proposal is rejected. If the required rate of return
is equal, the firm is indifferent as to whether accept or reject the proposal.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR)
Internal Rate of Return (IRR)
 Internal Rate of Return (IRR)
1. Calculate the pay back period. Incase the project generate the uneven streams of cash
flows, then the weighted average of cash inflows should be calculated. The original
investment must be divided by the weighted average cash flow to arrive at the artificial
payback period.
2. Then, search for the PVAF factor as near as possible to the figure obtained as payback
period in the row that stands for the life of the project. The interest rates that
correspond to the PVAF value should be taken as the range with in which the IRR lies.
 Benefit – cost Ratio (BCR)

BCR = Present value of benefits (PVB)

/ Initial investment(I)
• If BCR > 1, the project is accepted.
• If BCR < 1, the project is rejected.
 Benefit – cost Ratio (BCR)

NBCR = Net Present value of benefits

(NPVB) / Initial investment
= PVB/I/I
= PVB/I-1
=BCR-1
• If NBCR > 0, the project is accepted.
• If NBCR < 0, the project is rejected.
THANK YOU