WHAT IS PROJECT APPRAISAL ?

Project Appraisal is the analysis of costs and benefits of

a proposed project with a goal of assuring a rational allocation of limited financial resources amongst alternate investment opportunities with the objective of achieving specific goals. Project Appraisal enables the lending financial institution to make an independent and objective assessment of various aspects of an investment proposition to arrive at the financing decision. The various factors considered by financial institution while appraising a project are technical, financial, economic, commercial, social and managerial.


Since risk is involved in all activities associated with the

project, project appraisal aims at improving the quality of

projects and their long term profitability, aims at minimising the risk of lending by rectifying their

weaknesses

and

improving

their

effectiveness

by

incorporating into them safeguards missed by the promoters because of their lack of knowledge or

information.

Objectives of Project Appraisal

To extract relevant information for determining the

success or failure of a project.

To apply standard yardsticks for determining the rate of success or failure of a project. To determine the expected costs and benefits of the project. To arrive at specific conclusions regarding the project.

Significance of Project Appraisal

It helps in arriving at specific and predicted results. It evaluates the desirability of the project. It provides information to determine the success or failure of a project.

Various aspects or Methods of Project Appraisal

Financial Appraisal :

Financial appraisal is one of the most important prerequisite

for setting up of an enterprise. Since all the business activities revolve around finance, the importance of financial aspect cannot be underestimated . Successful implementation of a project proposal depends upon proper financial planning and appraisal.


Financial appraisal can be done using any or combination

of following methods :
Pay back period : Pay back period is the time required to

recover

the

original

investment

through

income

generated from the project. Pay back period = Original cost of investment

Annual cash inflow


Average rate of return : This method relates earnings to investments and the formula for calculating return on investment is
Return on Investment = Avg. annual earnings after tax Avg. investment after depreciation if Avg. Rate of return is higher than the required rate of return , the project is accepted.


Net present value method : This method considers the time value of money. This method highlights that a rupee today has a higher value than a rupee after a year from now.
NPV = Present value of cash outflows - Present value of cash inflows

if NPV is positive project is accepted.


Profitability index : Profitability index is the ratio of present value of expected future cash inflows and present value of cash outflows. Profitability index = Present value of cash inflows Present value of cash outflows If choice amongst two or more projects is there, projects with highest profitability index should be preferred over other projects.


Internal rate of return : This method takes into account time value of money by discounting cash inflows and outflows. IRR is that rate of discount at which the present value of cash-inflows is equal to the present value of cash outflows. Accept the proposal if the IRR is higher than or equal to the minimum required rate of return.


Technical Appraisal : It covers technical feasibility of the project which includes the study of adequacy of the proposed plant and equipment to produce the product within the prescribed norms. It is to be ascertained as to whether the technical know how is available with the entrepreneur or it is to be procured from elsewhere. Technical appraisal covers the following : Location of the project. Layout of the plant. Availability of infrastructural facilities like water, power, transport, etc.


Availability of raw material as per required quantity and quality. Availability of right type of work force in requisite number. Manufacturing process or technology selected.

 Managerial appraisal : The success of a venture depends to a great extent on the competence of management. If the management is incompetent, even a good project may fail. To judge the managerial capability of promoters, an appraisal should be made regarding their resourcefulness, understanding and commitment. The resourcefulness of promoters can be judged on the basis of their past experience. The understanding of the promoters is assessed in terms of the credibility of project plan, the estimated costs, the financial pattern, assessment of various inputs, marketing programme and details furnished to financial institutions. The commitment of the promoters is judged by the resources, financial, managerial, etc. applied to the project and the zeal with which objectives of the project are pursued.

 Environmental appraisal : A wide range of legislations have come into force for effective environment management. It has now become mandatory to obtain environmental clearance for all major projects.
Economic appraisal : It is also known as social cost benefit analysis Various aspects of economic appraisal are : Ensuring optimum utilisation of the scarce resources of the economy. Creation of employment opportunities. Contribution of the project to the GDP of the economy. Thus, economic appraisal should cover as to whether the project fits into national priorities, contributes to the development of desired sector of economy and other benefits justify the allocation of scarce resources of the economy.