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PROJECT APPRAISAL
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CONCEPT OF PROJECT
APPRAISAL
Simply speaking, project appraisal means the
assessment of a project. Project appraisal is made forboth proposed and executed projects.
In case of former, project appraisal is called 'ex-ante
analysis'and in case of latter 'post-ante analysis'. Here, project appraisal relates to a proposed project.
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Project appraisal is a costs and
benefits analysis of differentaspects of proposed project with
an objective to adjudge itsviability.
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A project involves employment
of scarce resources. Anentrepreneur needs to appraise
various alternative projectsbefore allocating the scarce
resources for the best project.
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Thus, project appraisal helpsselect the best project among
available alternative projects.
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For appraising a project, itseconomic, financial, technical,
market, managerial and socialaspects are analyzed.
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Financial institutions do projectappraisal to assess its credit-
worthiness before extending
finance to a project.
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For a financial institution, project appraisal is aprocess whereby a leading financial institutionmakes an independent and objective assessment of
the various aspects of aspects of an investmentproposition for arriving at a financial decision andis aimed at determining the viability of a projectand sometimes, also in modifying its scope andcontent so as to improve its viability.
However, sometimes project appraisal and projectevaluation are used interchangeably.
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METHODS OF PROJECT
APPRAISAL Appraisal of a proposed project
includes the following analyses:
1. Economic Analysis
2. Financial Analysis
3. Market Analysis
4. Technical Feasibility
5. Managerial Competence
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1. Economic Analysis
Under economic analysis, the aspects
highlighted include requirements for raw
material, level of capacity utilization,anticipated sales, anticipated expenses and
the probable profits.
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It is said that a business should have
always a volume of profit clearly in
view which will govern other
economic variables like sales,purchases, expenses and alike.
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It will have to be calculated how
much sales would be necessary to
earn the targeted profit.
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Undoubtedly, demand for theproduct will be estimated for
anticipating sales volume.
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Therefore, demand for theproduct needs to be carefully
spelt out as it is, to a great extent,
deciding factor of feasibility of
the project concern.
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In addition to above, the location
of the enterprise decided afterconsidering a gamut of points
also needs to be mentioned in theproject.
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The Government policies in this
regard should be taken into
consideration.
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The Government offers specificincentives and concessions for
setting up industries in notified
backward areas.
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Therefore, it has to be ascertained
whether the proposed enterprisecomes under this category or not and
whether the Government has already
decided any specific location for thiskind of enterprise.
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2. Financial Analysis
Finance is one of the most important pre-
requisites to establish an enterprise.
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It is finance only that facilitates
an entrepreneur to bring togetherthe labour of one, machine of
another and raw material of yetanother to combine them to
produce goods.
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In order to adjudge the financial
viability of the project, thefollowing aspects need to be
carefully analyzed:
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a. Assessment of the financialrequirements both - fixed
capital and working capital -
need to be properly made.
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b. In accounting, working capital means
excess of current assets over currentliabilities. Current assets refer to those assets,
which can be converted into cash within a
period of one week. Current liabilities refer tothose obligations which can be payable within
a period of one week.
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3. Market Analysis
Before the production actually starts, the
entrepreneur needs to anticipate the possible
market for the product.
He/she has to anticipate who will be the
possible customers for his product andwhere and when his product will be sold.
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This is because production has no value
for the producer unless it is sold.
It is said that if the proof of pudding lies
in eating, the proof of all production lies
in marketing/ consumption.
In fact, the potential of the market
constitutes the determinant of probable
rewards from entrepreneurial career.
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4. Technical Feasibility
While making project appraisal, the technical feasibility ofthe project also needs to be taken into consideration.
In the simplest sense, technical feasibility implies to meanthe adequacy of the proposed plant and equipment toproduce the product within the prescribed norms.
As regards know-how, it denotes the availability orotherwise of a fund of knowledge to man the proposedplants and machinery.
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It should be ensured whether thatknow-how is available with the
entrepreneur or is to be procuredfrom elsewhere.
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In the latter case, arrangementmade to procure it should be
clearly checked up.
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If project requires anycollaboration, then, the terms and
conditions of the collaboration
should also be spelt out
comprehensively and carefully.
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In case of foreign technical
collaboration, one needs to be awareof the legal provisions in force from
time to time specifying the list of
products for which only suchcollaboration is allowed under
specific terms and conditions.
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The entrepreneur, therefore,
contemplating for foreigncollaboration should check these
legal provisions with reference totheir projects.
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While assessing the technical feasibility of the project,
the following inputs covered in the project should also
be taken into consideration:
1. Availability of land and site.
2. Availability of other inputs like water, power, transport,
communication facilities.3. Availability of servicing facilities like machine shops,
electric repair shop, etc.
4. Coping-with anti-pollution law.
5. Availability of work force as per required skill and
arrangements proposed for training-in-plant and outside.6. Availability of required raw material as per quantity and
quality.
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5. Management Competence
Management ability or competence plays an
important role in making an enterprise a
success or otherwise.
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Strictly speaking, in the absenceof managerial competence, the
projects, which are otherwisefeasible, may fail.
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On the contrary, even a poorproject may become a successful
one with good managerial ability.
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Hence, while doing project
appraisal, the managerialcompetence or talent of the
promoter should be taken intoconsideration.
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Research studies report that mostof the enterprises fall sick
because of lack of managerial
competence or mismanagement.
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TECHNO ECONOMIC
INNOVATION AND
FEASIBILITY STUDY
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A feasibility study is a preliminarystudy undertaken before the real work of aproject starts to ascertain the likelihood of the
project's success.
It is an analysis of all possible solutions to a
problem and a recommendation on the best
solution to use.
It involves evaluating how the solution will
fit into the corporation.
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TECHNO ECONOMIC INNOVATION AND
FEASIBILITY STUDY
Definition: Techno Economic Feasibility
examines the possibility of manufacturing theend product in the pre determined quantity withdesired quality and the sale of the same resultsinto adequate return to pay back the investmentmade within a reasonable period of time overthe project life with the help of the facilitiesinstalled and resources employed.
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TECHNO-ECONOMIC
PROJECTS: Projects classification based on techno-
economic characteristics fallin this
category.
This type of classification includes factorsintensity-oriented classification,causation- oriented classificationandmagnitude-oriented classification.
( ) F I i O i d
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(a) Factor Intensity-Oriented
Classification:
Based on factor intensity classification,
projects may be classified as capital intensive
or labor intensive.
If large investment is made in plant andmachinery, the projects will be termed as
'capital-intensive'.
On the contrary, projects involving largenumber of human resources will be termed as
"labor intensive'.
(b) C ti O i t d
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(b) Causation-Oriented
Classification:
Where causation is used as a basis ofclassification, projects may be classified as
demand based or raw material based projects.
The very existence of demand for certain goods
or services, makes the project demand-based andthe availability of certain raw materials, skills orother inputs makes the project raw material-based
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(c) Magnitude-Oriented
Classification:
In case of magnitude-oriented classification,based on the size of investment involved in theprojects, the projects are classified into large scale,medium-scale or small-scale projects.
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Project classification based ontechno-economic characteristics is
found useful in facilitating the
process of feasibility appraisal of theproject.
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